mugur isarescu : transition – how to secure a stronger economic future for the constituency? speech by mr mugur isarescu, governor of the national bank of romania, in the panel on “ transition : how to secure a stronger economic future for the constituency? ”, during the annual meeting of the imf and world bank constituency, kyiv, ukraine, 4 june 2016. * * * ladies and gentlemen, in my address i would like to focus on the challenges in conducting monetary policy in a way that will contribute to securing a stronger economic future for countries in our constituency. obviously, my account is shaped by romania ’ s experience, but i hope it will still keep you interested, as it may be relevant for other small to medium - sized emerging economies. 1. brief account of monetary policy regimes in romania at the time when the national bank of romania had to choose a strategy for conducting its monetary policy, i. e. in the early nineties, monetary targeting was actually the only feasible option. not only did the low forex reserves preclude a fixed exchange rate arrangement, but, even if possible, the alternative was not suitable given the widening external imbalance. however, by the end of the decade, monetary targeting had reached its operational limits given the break in the relation between monetary aggregates and inflation, a phenomenon which matched developments elsewhere in the world. at that point, we took into account pegging the exchange rate, but neither the hard nor the soft version was deemed appropriate. on one hand, a crawling peg helps control inflation when it is brought down from 30 % – 40 %, but it is less useful when a lower level is envisaged, since the crawl incorporates inflation expectations. on the other hand, exchange rate flexibility was seen as an asset for an economy as big and rigid as romania was at the time, especially given the upcoming stages of capital flow liberalisation. against this background, romania opted for inflation targeting as early as 2002, even though it took several years of preparations until the actual adoption, in august 2005. the nbr chose the “ light ” version of the strategy, which meant retaining the managed float feature of the exchange rate regime. the actual form that inflation targeting took in romania matched the “ managed - floating plus ” concept, considered the most suitable choice for an emergingmarket economy involved in the global capital market. this concept, introduced by goldstein in 2002, combines the managed float part, allowing for fx market interventions in order to

##z hu si pt lu ie es cy fi se el be it nl uk fr dk at de 0. 0 0. 3 0. 5 0. 8 1. 0 1. 3 1. 5 1. 8 2. 0 2. 3 2. 5 taxes on immovable property % of gdp 2. 8 3. 0 3. 3 3. 5 source : eurostat, esrb report figure 9. gini coefficient and gdp per capita, 2015 gdp ( current prices, pps per capita ) euro area 19 czech republic poland hungary romania bulgaria gini coefficient source : eurostat figure 10. housing cost overburden rate - romania percent 1st 47 % 44. 9 % 24 % 1st q 2nd q 3rd q 4th q 5th q note : percent of population with costs more than 40 % of disposable income costs include rental or mortgage interest payments, cost of utilities such as water, source : eurostat figure 11. savings behavior in romania - 2016 percent 82. 7 25. 9 19. 1 6. 6 14. 4 11. 6 2. 9 2. 5 0. 3 eur 0 - 2, 200 eur 2, 200 - 11, 000 eur 11, 00022, 000 % in total number of depositors eur 22, 000100, 000 % in total deposits > eur 100, 000 source : bdgf figure 12. access to mortgage loans percent 12. 3 4. 0 2. 0 1. 5 0. 9 1st q. 2nd q. 3rd q. 4th q. 5th q. note : share of households with mortgage loans in total households, by income quintiles source : ministry of finance, central credit registry, credit bureau figure 13. access to credit mar - 17 oct - 16 may - 16 dec - 15 jul - 15 feb - 15 sep - 14 apr - 14 nov - 13 jun - 13 jan - 13 aug - 12 mar - 12 oct - 11 may - 11 dec - 10 jul - 10 feb - 10 sep - 09 apr - 09 nov - 08 jun - 08 jan - 08 aug - 07 mar - 07 percent interest rate of mortgage loans, ron ( % ) interest rate for new mortgage loans, ron ( % ) robor 3 m price to income source : eurostat, nbr, credit bureau figure 14. mortgage credit and the gross savings rate percent percent figure 15. share of local currency mortgages percent " first house " ( % gdp ) mortgage credit other than " first