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

100%
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.
2

Effectiveness of central-bank intervention on foreign-exchange markets. International experiences and theoretical considerations.

100%
Kiss M. N.
Kozgazdasagi Szemle (Economic Review)
|
2005
|
vol. 52
|
issue 11
846-872
EN
Although recent years have seen a decline in major central banks' FX market activity, such intervention has remained an active policy tool in several emerging economies and/ or countries applying inflation targeting. The paper surveys the literature on its effectiveness, presenting relevant theories and international empirical evidence and trying to identify aspects that increase effectiveness under various circumstances. Only cautious conclusions can be drawn. Central-bank intervention can be effective, mainly because FX activity by central banks can shape market expectations and influence the process of information aggregation. The effectiveness can be improved by matching objectives with appropriate intervention techniques and matching intervention strategy to circumstances in a flexible way. Intervention aiming at delivering strategic policy objectives is likely to be more efficient if pre-announced, transparent, coordinated with other central banks, and in line with macroeconomic policy. But to reach tactical objectives, central banks should conduct intervention in secret, paying heed to timing, around macro news announcements or during heavy trading volume. Central bankers should keep in mind that intervention - regardless of the chosen technique - affects the exchange rate mainly in the short or medium run. A more permanent shift in exchange rates calls for a change in fundamentals such as monetary-policy action..
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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