It’s been quite some time since I started studying Moldovan monetary phenomena. Before diving into the long list of unanswered questions, let me summarize my humble findings. So, the things I know:

  1. National Bank of Moldova is targeting inflation (just as it declared).
  2. Although officially MDL is a [dirty] floating currency, National Bank of Moldova implicitly maintains a soft peg to the US dollar. Theoretically, doing so makes it more difficult for the NBM to [efficiently] target inflation.
  3. Moldova’s capital account is far from being liberalized. From the point of view of the “impossible trinity”, imperfect cross-border mobility of capital allows monetary authorities to enjoy exchange rate stability and monetary independence at the same time.

The things I do not know are more numerous.

  1. The parameters of the peg — the rate of depreciation, exchange rate variability etc. — changed over time, but regime changes could not be associated with any known events. What caused these regime switches?
  2. Contrary to expectations, the euro has no significant weight in the peg. Why a dollar peg?
  3. NBM neither announces, nor reports about it’s foreign exchange interventions. Only monthly data on interventions are available. What is the objective of these transactions — “maintain the trend”, “return to the trend”, “reverse the trend”, “increase the official reserves”, or? Why are the interventions performed in a secret manner? What is the objective of pegging, in general — to protect official reserves, to protect forex-denominated investments, to secure forex-denominated liabilites, to stimulate foreign trade, or?
  4. What is the relationship between exchange rates and domestic prices? A conventional wisdom suggests that the pass-through of exchange rates to import prices, and further to inflation, must be very high.
  5. Is monetary policy really independent? Is there an explicit policy function? Does it include exchange rates?

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