The main features of Hungary's monetary transmission mechanism
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This paper attempts to aggregate and summarize fresh findings on the monetary transmission mechanism in Hungary. Within a research project at the National Bank of Hungary, nine studies have appeared that investigate the channels through which Hungarian monetary policy affects the economy. This paper creates a framework for synthesizing particular results, based on Mishkin's (1996) classification, and analyses how aggregate demand is affected through these channels. The conclusion is that in the last ten years, monetary policy has exerted measurable influence on real activity and prices. The dominance of the exchange-rate channel explains why prices respond faster and output responds more mildly than in closed developed economies like the United States or the Euro Zone. We expect that after Hungary's adoption of the euro, the absence of an exchange rate will be compensated by the fact that the interest-rate channel will work through foreign demand as well, so that no significant monetary-transmission asymmetries can be expected when the country is inside the Euro Zone.
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