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Inflation Inertia and Inflation Persistence in Romania Using a DSGE Approach

Abstract In this study we propose to analyze the monetary policy of the Romanian central bank and to evaluate the inflation inertia and persistence. Thus, we estimate two DSGE models, a simple neokeynesian standard model built around a forward-looking component and in order to offer a more complex perspective we also estimated a DSGE model that captures the inflation inertia. The results show that the prices evolution reflects the difficulties of eliminating the inflation inertia. In Romania, the historic inflation evolution has a major impact on the way the inflation expectations are formed. Even if the inflation decreased at a moderate level, its persistence continues for a long period of time.