The paper presents calculations of the optimal horizons for inflation targeting in Hungary, using small-scale macro and vector auto-regressive models, relying on the theoretical framework of Batini and Nelson (2000). Given the assumed parameter values of central-bank preference, it was found that current National Bank practice, i. e. putting the inflation forecast for the next one to one-and-a-half years into the policy rule and using this horizon in its communication, can be regarded as optimal with respect to welfare analysis. In most cases of potential future shocks, this horizon also proved long enough to bring inflation back on target following an optimal monetary policy. However, there is no precluding the probability of future shocks that divert inflation from its target for longer than one to one-and-a-half years, when MNB follows an optimal monetary policy.
V. Varpalotai, no address given, contact the journal editor
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