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THE ROLE OF MONETARY POLICY IN HUNGARY'S HANDLING OF THE FINANCIAL CRISIS (A monetaris politika szerepe Magyarorszagon a penzugyi valsag kezeleseben)

100%
Nemenyi J.
Kozgazdasagi Szemle (Economic Review)
|
2009
|
vol. 56
|
issue 5
393-421
EN
The international financial crisis caught the Hungarian economy in the midst of a process of budgetary adjustment and prevented a period of two years' restrained growth from giving way to the recovery. Instead, the ever steeper decline in world economic demand pushed the Hungarian economy into recession. The deterioration in performance and prospects was compounded by a domestic political crisis, which increased uncertainty in economic policy. The country's declining credit rating and the drastic fall in available foreign funds after the Lehman collapse in September 2008 led to a flight of foreign investment on the government securities market, which put pressure on the exchange rate and called for rapid adjustment by financial institutions. The level of indebtedness caused volatility that narrowed the room for budgetary and monetary policies in managing the crisis. The article surveys the factors of external and internal origin that brought on a situation marked by shortage of funds, excessive indebtedness and a high proportion of foreign-exchange denominated liabilities. It examines how events in the new, post-Lehman stage in the world crisis have affected the frames and strategy of Hungarian monetary policy and its room for manoeuvre.
2

A liquidity trap and deflationary spiral in a model for pursuing an inflation target – the role of credibility

75%
Koppany K.
Kozgazdasagi Szemle (Economic Review)
|
2007
|
vol. 54
|
issue 11
974-1003
EN
Reaching the lower limit of the nominal interest rate may have grave effects on the equilibrium and stability of the macro economy. Then the negative shock effects that threaten recession and too low a level of inflation cannot be absorbed by traditional measures of interest policy, and the economy, in the absence of other types of demand-stimulating measures, may easily slip into a state where the interest level stabilizes at a minimum value, and a spiral of decreasing output and price level results. This theoretical study uses a simple, stylized macroeconomic model to examine the possibility of such situations occurring. The formally deduced conditions for a liquidity trap and deflationary spiral to ensue show how the limits on the scope of interest policy are affected by the setting of the inflation target, the equilibrium level of real interest rate characteristic of the economy, the character and strength of the shock effects, the extent of the central bank's interest-rate reactions to these, and the credibility of the inflation target. The conclusions can be seen in parallel with the results of model calculations on the likelihood of the liquidity trap, and generally accepted recommendations for avoiding or remedying this. The model shows that the likelihood of reaching a zero interest rate can never in theory fall to zero, but entry into the deflationary spiral of a liquidity trap can be excluded in principle if attainment of the inflation target has a high degree of credibility.
3

Exchange-rate policy and inflation targeting in Hungary

63%
Erdos T.
Kozgazdasagi Szemle (Economic Review)
|
2007
|
vol. 54
|
issue 10
853-875
EN
The inflation targeting system applied in Hungary since 2001 relies on monetary policy to ensure that the consumer price level remains stable in the medium and long term, or at most rises very slowly, by which a rise of approximately 2 per cent a year is to be understood. Alternatively, if the monetary authority has to reckon with existing rapid inflation, the aim must be a considerable reduction in the inflation rate year by year. If monetary policy has already succeeded in bringing down inflation, the low rate must be permanently secured. However, it is not certain that preference in monetary policy should go to inflation targeting under all circumstances. Such a policy has a favorable effect only if two substantial preconditions apply: public finances are near equilibrium and nominal wages regularly adjusted to the GDP growth rate. If these preconditions are lacking, inflation targeting may have harmful effects too: currency overvaluation, excess of domestic utilization over GNP, increases in internal and external debt, decreasing rates of savings and investment, and lower economic growth potential. The author examines how to develop economic and within that monetary policy so that inflation targeting may be efficiently applied.
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