This study briefly presents theoretical aspects related to the relationship between inflation and economic growth and provides an empirical study for the Romanian economy, for the period 2000 – 2011. The econometric methodology used is that of vector auto-regressions. The results showed that a sudden increase in the change of the output gap (i.e. a shock to the growth rate of the output gap) does not determine an increase in CPI. Hence, the hypothesis of the existence of a speed limit effect in Romania is rejected. In concrete terms, this means that the monetary authorities should not fear for eventual inflationary pressures when sudden increases of demand arise, if the output gap is negative (the potential output is higher that the effective output). The National Bank of Romania may avoid, therefore, taking some monetary policy decisions meant to temper the rise in inflation (as would have been the case if a speed limit effect was present) but which would have induced unnecessary volatility into the output. However, the study indicates that National Bank of Romania should communicate to the public the state of the economy in order to timely anchor the inflation expectations. This is a very important aspect, since the inflation expectations firmly react to a shock into the growth rate of the output gap, i.e. to a strong increase in the effective output. The study also showed a positive response of the growth rate of the output gap to a positive shock in inflation, with a maximum effect after three quarters. This shows that the inflation was mainly driven by demand factors in the analysed period, with the consumers increasing current consumption in order to avoid the future higher prices and with the economic agents increasing the supply such as to maximise the unitary profits. Also, this result shows a rather inelastic demand or a possible captivity of consumers in the face of producers.

The goal of this paper is to provide a characterisation of the monetary policy transmission mechanism in Romania over the period 2000 - 2011. The main contribution of this paper is the layering of empirical evidence regarding the transmission mechanism split such as to compare the results before and after the implementation of the inflation targeting regime by National Bank of Romania. The methodology used in the article is that of vector autoregressions, a widely used empirical methodology in order to analyse the monetary policy. The results of the analysis show that the National Bank of Romania was more successful in controlling the transmission mechanism after implementing the direct inflation targeting and this monetary regime was properly chosen so as to allow the central bank to deal with the complexity and uncertainty issues raised by the current structural problems of the Romanian economy. Moreover, this strategy provides the National Bank of Romania a similar policy framework to that of the European Central Bank, this fact being an advantage given the desired adoption of the euro.