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WP 2013/01 – Katalin Szilágyi–Dániel Baksa–Jaromir Benes–Ágnes Horváth–Csaba Köber–Gábor D. Soós: The Hungarian Monetary Policy Model


March 2011 marked the introduction of the Magyar Nemzeti Bank’s Monetary Policy Model (MPM), representing a paradigm shift in both macroeconomic projection and monetary policy decision support. In contrast to previous conditional projections, the MPM provides an endogenous definition of both the projected policy rate and the projected exchange rate. Given the forward-looking nature of the model, expectations of economic agents play a key role in the monetary transmission process; therefore, the future achievement of the inflation target is guaranteed by the projected path of the interest rate over the forecast horizon. In this paper, we discuss the underlying structure and logic behind the MPM, describe the key behavioural equations and examine how the channels of monetary transmission appear in the model. In addition, we present the empirical validation process in detail from calibration, through Bayesian estimation and discussion of the economic properties of the model to the historical projection exercise. Finally, we discuss the main challenges we faced during the first year of application.

JEL: C51, E17, E52, E58.

Keywords: model projection, simulation, central banking, monetary policy.