But the interest rates households and companies could borrow at did not fall as much, as risk and liquidity premiums increased at the same time. However, these observations do not mean that the effects of changes in the repo rate have altered. A more reasonable interpretation is that the cuts in the repo rate have been counteracted by, and perhaps sometimes drowned  BIS central bankers’ speeches  11  in, other effects.22 If the repo rate had not been cut as aggressively, households and companies would most probably have had to pay higher interest rates. Misinterpreted: Monetary policy in small economies is determined internationally A traditional textbook account would say that a country that has a floating exchange rate and allows the free mobility of capital across national borders can formulate its monetary policy to attain a domestic inflation target. But Rey (2013) claimed recently in a widely-read paper that this conclusion is no longer valid. She argued that globalisation and the increasing international flows of capital meant that monetary policy around the world must adapt to monetary policy in the dominant economies, primarily the United States. Rey’s theory is that large amounts of capital will flow into a country that tries to conduct a tighter monetary policy. The capital inflow will either lead to an undesired appreciation of the country’s currency or to asset prices in the country rising too quickly.
Moreover, in 2016, the wealthiest region in Romania was almost four times richer than the poorest one (measured by the regional GDP per capita as a percentage of the euro area average). The second guiding principle towards sustainable and smooth convergence is to keep going. By this, I mean that progress, once made, should not be undone. We now need to maintain the economy on an upward trend, while being extremely careful to preserve the macroeconomic equilibria restored through a painful adjustment after the crisis. The only way ahead is by means of a coherent macroeconomic policy mix and resolute structural reforms aimed to boost the economy’s growth potential, while making it more resilient. This approach should never leave room for pro-cyclical policies. As we have clarified that the consistency and the sustainability of real convergence are extremely important, now it is time to discuss how monetary policy can support these two dimensions of the convergence process. It is beyond any doubt that countercyclical monetary policy favours smooth convergence. This has always been one of the guiding principles for calibrating the stance of NBR’s monetary policy, as well as for developing and employing our policy tools. An example of the latter are the unorthodox prudential measures taken before the global crisis to mitigate the impact of extremely volatile capital flows; with these in mind, the IMF mentioned the NBR as being among “the pioneers” of what was later referred to as “macroprudential instruments”.