Abstract. This paper investigates the effects of monetary and fiscal policy shocks in a former communist country from Eastern Europe, Romania. Struggling to develop a functional market economy, Romania has seen multiple economic policy makers throughout the years who have taken various decisions in order to achieve macroeconomic stability and contribute to the mentioned goal, while supporting economic growth. What are the implications of these decisions on the main macroeconomic indicators? Using relevant literature, we develop a fiscal SVAR into a fiscal-monetary SVAR by adding a new variable, the short-term interest rate on the interbank market, relevant for the monetary policy. We find that, as the central bank’s strategy of targeting inflation states, monetary policy is relevant to control inflation on the mid-term horizon. On the other side, fiscal policy shocks, represented by government expenditure and revenue shocks, are set to have marginal impacts on the main macroeconomic indicators. We also find that fiscal policy shocks have implications on monetary policy, triggering a swift response from it.

Keywords: monetary policy, VAR, fiscal policy, government expenditure, interest rate.