AN ESTIMATED MODEL WITH MACRO-FINANCIAL LINKAGES FOR THE ROMANIAN ECONOMY

The current global economic and financial crisis has highlighted the strong interactions between the financial sector and real economy. In this paper we analyze recent developments in the Romanian economy from the perspective of these macroeconomic and financial linkages. To this end, we estimate a small open economy new Keynesian model incorporating a banking sector and financial frictions, in the form of collateral constraints and spreads between interest rates on loans and deposits and the money market rate. Both collateral requirements and interest rate spreads are subject to exogenous shocks. We find that financial shocks negatively affected economic activity since end-2008. Their impact was most intense, albeit not overriding, during the first three quarters of 2009.