Chart 1 in Figure I depicts the evolution of the current account deficit prior to the end of the episode of sizeable capital inflows (“0” on the horizontal axis). This depiction reflects the identity typical of the balance of payments, namely that the current account deteriorates during the episode of massive capital inflows. At the same time, the end of the episode of heavy capital inflows overlaps the initiation of current account adjustment towards levels seen in the run-up to the reversal. The V-shaped pattern of current account developments is sharper in low- and middle-income countries (Reinhart and Reinhart, 2008). In line with expectations, real GDP growth is relatively high during a capital flow bonanza and is followed by a sudden drop in the year when the episode ends and a relatively fast recovery thereafter. In other words, subsequent to the end of the cycle of heavy capital inflows, the GDP trajectory is V-shaped, as illustrated in Chart 2, Figure I. The attempt at identifying a pattern on how inflation fared was the most difficult, because the data presented in the literature vary to a great extent, which could be an indication of the major role played by monetary policy both before and after the large capital inflows.
Therefore, the measures set forth in the said arrangements secured the financing of Romania’s economy. This financing had a favourable impact in several areas: relatively larger investment compared to the case such arrangements would not have been concluded; slower depreciation and stabilisation of the leu against the euro and other currencies; the signing of the Vienna agreement based on which banks committed themselves to roll over the credit lines and to maintain capital adequacy ratios at safety levels. As for the future developments in the real effective exchange rate of the domestic currency, it is desirable that it stabilise around a level consistent with a current account deficit that may be safely covered via foreign direct investment. BIS Review 5/2010  15  Lower depreciation pressures on the leu and, implicitly, lower inflationary pressures ceteris paribus that emerge via the exchange rate channel, along with the fiscal consolidation efforts allowed the central bank to adopt a cautious easing of the monetary policy stance, which will make the descending slope of the GDP less sharp, without fuelling further inflationary pressures. The expected developments in GDP, inflation and the current account deficit presented in Figure III are similar to the profiles of the trajectories illustrated in Figure I. Figure III 1. Current account deficit* (% of GDP) 0  2.