Painless Disinflation? Monetary Policy Rules in Hungary, 1991-1999
Posted: 19 May 2002
The evaluation of the output cost of monetary stabilization is one of the main macro questions to be addressed when comparing alternative strategies and paths to monetary convergence in the economies in transition. In general, the evaluation of the output costs of stabilization (and hence of the desirable speed of convergence) should properly be addressed in reference to a model of the macro economy as a whole. To this purpose, we estimate a small structural model for inflation, the output gap, the domestic interest rate and the exchange rate for Hungary during the period of the transition (1991-1999). The transmission of monetary policy impulses to macro variables is characterized in a similar fashion to that of advanced open industrial countries. In particular, in the context of our rational expectations, forward-looking model, the interest rate channel on aggregate demand and the exchange-rate channel work together as parts of the same disinflation policy. We draw several conclusions on understanding and modeling the effects of monetary policy, and also on the desirable design of policy rules during the process of disinflation.
Keywords: Disinflation policy, Interest rate rules, Transition economies, Hungary, Small open-economy macro models, Estimation and simulation of rational expectations models
JEL Classification: E17, E52, P24
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