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  1. 1 Kozgazdasagi Szemle (Economic Review)

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  1. 1 2008

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  1. 1 Abel I.

  2. 1 Kobor A.

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Interest-rate differentials, speculative capital flows and exchange-rate volatility

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Abel I., Kobor A.
Kozgazdasagi Szemle (Economic Review)
|
2008
|
vol. 55
|
issue 11
941-961
EN
Interest rates on the Hungarian forint are higher than interest rates in the Euro area or other countries in the region. Interest-rate decisions are based on assessing several factors in monetary policy. This paper evaluates the effects of a sizable interest-rate differential between Hungary and the Euro area on the exchange rate and on its volatility. There is a difference in the effects of the interest-rate differential on the exchange rate in the short run and in the long run, but a higher interest-rate differential tends to increase exchange-rate volatility on both horizons. There is a triangular relation between interest-rate differential, speculative capital flows, and exchange-rate volatility. Any angle in this triangular relation points to the importance of the financial-stability consideration in forming monetary policy.
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