Monetary policy and time varying parameter vector autoregression model

The aim of this paper is to present an estimation about the evolution of the monetary policy transmission mechanism in Romania over a specific period of time, by using a time-varying vector autoregression model. Impulse responses to a monetary policy shock are computed and sign restrictions are used in order to identify a monetary policy shock. The assumption that is being used as a starting point is that a monetary policy shock is the one that leads to an increase of the interest rates and in the same time to a decrease in inflation and output growth. The aim of this study is to observe whether the impulse response functions show evidence of significant variation across time. The importance of analyzing this phenomenon comes from the importance of ensuring price stability as long as sustainable economic growth for Central Banks. (C) 2015 The Authors. Published by Elsevier B.V.