Since monetary policy primarily affects the economy through long-term real interest rates, and therefore through agents’ expectations for the future paths of the policy rate and of inflation, the end result would be more accommodative policy during the downturn than recommended under the IT regime. 2  BIS central bankers’ speeches  A more modest proposal was to keep the IT regime, but increase the targeted level of inflation. The crisis and the bubbly period that preceded it convinced many that the modern macroeconomy is more prone to shocks that previously believed, and therefore the 2% target level that prevailed in mature economies before the crisis was perhaps too low to keep the economy from repeatedly hitting the zero lower bound. My take on this debate is that, at the end of the day, inflation targeting emerged even stronger from the crisis. No major central banks abandoned inflation targeting, and some central banks that were not inflation-targeters adopted elements of the framework. There are several reasons for the resilience of the IT regime: •  Central banks found that inflation targets were actually helpful in explaining the need and the room for unconventional policy measures to the general public. •  Furthermore, inflation targets helped anchor inflation expectations, keeping deflation at bay despite the large output gaps prevalent at the height of the crisis. •  The proposed new monetary policy regimes suffer from a number of practical deficiencies. They are too complex for the general public to understand and follow.
Indeed, the pandemic’s immediate economic impact was unprecedented and the pandemic caused the steepest drop in output in Europe’s post-war history. 1/3  BIS central bankers' speeches  With respect to the National Bank of Romania’s responsibilities, since the outbreak of the COVID-19 pandemic in March 2020, we have taken a series of measures proportionally with the evolving situation. When the pandemic broke out, the NBR initiated a program containing measures aimed at supporting the economy: It lowered the policy rate, but stopped at 1.25% Kept liquidity in the system at moderate levels, but avoiding to flood money market with excessive cash and looking carefully to a relative stability of the exchange rate Acquired a moderate volume of government bonds on the secondary market to stabilize the yields. Once inflation re-emerged, the NBR started a normalization process, with an adequate sequence (spring 2021): Stopped the purchase of government bonds Tightened liquidity control Since autumn − increased policy rate and extended the interest rate corridor On the macroprudential front, we have implemented similar measures adopted at the European level in order to ensure banks preserve their ability to finance the economy in a sustainable manner. The Romanian banking system entered the COVID-19 crisis with significantly improved financial soundness indicators compared to the 2008 financial crisis. The banking sector remains well capitalized, with liquidity ratios well above prudential requirements, and with adequate resources to fight back if NPL ratios will restart growing, as expected all around the world.