Econometric assesment of the effectiveness of monetary policy rate on price stability

Abstract

The purpose of this research is to investigate theoretically and empirically the effectiveness of the monetary policy rate in the mechanism of transmitting monetary impulses to the real economy. The decision-making factor associated with the level of the monetary policy rate and the appropriate time of application of this instrument is the basis for an optimal monetary policy from the perspective of ensuring and maintaining price stability. The methodological and empirical aspect is based on the estimation of an error correction model (VECM) by applying the Johansen cointegration test in order to determining the presence of cointegration relationship. The model and the variables included in the model, such as economic growth, inflation and monetary policy rate were associated with the Republic of Moldova. The results of the research highlight the validity of the generated model, and the results of the Johansen cointegration test indicate the presence of long-term cointegrated relationships between variables. Thus suggesting that the NBM base rate is the significant monetary policy instrument applied by the National Bank of Moldova with repercussions on the evolution of the inflationary process, highlighting the persistence of the interest rate channel in reaching the inflation target. JEL: C52; E31; E43; E52.