Front Matter Page
Research Department
Contents
Summary
I. Introduction
II. Exchange Rate Policy in Hungary
III. To Sterilize or Not to Sterilize: Major Considerations for Economies in Transition
1. Monetary control in EIT
2. The sterilization dilemma
IV. A Reaction Function for the National Bank of Hungary and the Behavior of Money Demand
1. Specification and estimation of a reaction function
2. Specification of a money demand function
3. Data sources
V. Estimation Results
1. Reaction functions of the National Bank of Hungary
2. Estimates of household sector money demand
VI. Conclusions
Text Tables
1. Hungary: Capital Flows and External Debt, 1988–94
2. Hungary: Reaction Functions of the National Bank of Hungary, 1991–94: Two-Stage Least Squares
3. Hungary: Household Sector Money Demand Estimates
Figures
1. Hungary: Real Effective Exchange Rates, 1987–94
2. Hungary: The Monetary Base and International Reserves, 1987–94
3. Household and Enterprise Sector Real Balances
Appendix Table
A1. Hungary: Schedule of Forint Devaluation Rates, 1989–94
References
Summary
This paper considers the performance of monetary policy in Hungary during the 1990s, particularly attempts by the National Bank of Hungary (NBH) to sterilize capital inflows. The results of the analysis suggest that only during the second half of 1994 did the NBH successfully sterilize capital inflows in order to pursue its objective of targeting the real exchange rate of the forint.
No sterilization effect could be detected when a subsample, which excluded the period when the former Communists returned to power, was considered. The same result held true when the real exchange rate was measured with consumer prices rather than producer prices, or when domestic credit was used to proxy monetary policy actions. Nevertheless, other more descriptive and anecdotal evidence suggests that a policy change did take place sometime during 1994 when the NBH moderated growth of the monetary base via sterilization, in line with its more restrictive monetary policy but contrary to the intended policy of the newly elected government in May 1994.