Monetary Policy Analysis with a Quarterly Projection Model: Hungary

The calibration of monetary policy is particularly challenging at a time of large shocks. Interest rates in Hungary rose sharply in response a significant increase in inflation and depreciation in the forint in 2022.
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Volume/Issue: Volume 2024 Issue 036
Publication date: August 2024
ISBN: 9798400286483
$15.00
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Topics covered in this book

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Banks and Banking , Inflation , Investments and Securities-General , Money and Monetary Policy , Market interest rates , Commodity prices , Inflation targeting , Exchange rates , Return on investment , Inflation , Exchange rate risk , Central bank policy rate , Output gap , Real interest rates , Real exchange rates , Hungary , Monetary Policy , Inflation , Forecasting

Summary

The calibration of monetary policy is particularly challenging at a time of large shocks. Interest rates in Hungary rose sharply in response a significant increase in inflation and depreciation in the forint in 2022. As inflationary pressures have eased, the base rate has been reduced but remains restrictive. Balancing the risks of loosening too quickly and inflation taking longer to return to target against those of loosening too slowly with larger costs to output requires careful calibration. This paper uses a Quarterly Projection Model to provide a quantitative guide to the calibration of monetary policy in Hungary. As underlying inflation remains elevated and second-round effects continue to push up services inflation, the model suggests that further cuts in interest rates should proceed cautiously and gradually.