The seminar will be held in Visitor Centre at 2.30 pm. Hungarian paper in English language.
Discussant: György Kopits
Abstract
Taylor rules are widely used in monetary policy evaluation. These type of studies can address two different questions. One is to find a benchmark for the interest rate in order to judge whether the interest rates are too high or too low. The other is to describe the relationship between interest rates and other macro variables. In this study both of these are addressed for Hungary’s five years of inflation targeting. In general it is concluded that the original Taylor-type rules fit well the Hungarian interest rates. However, if the open-economy characteristics are taken into account, the fit can be further improved. Deviations of the interest rate from the original benchmark level can be related either to the existence of an exchange rate band or to changes in risk premium. As of the relationship with other macro variables, the interest rate does not seem to be related to the output gap, but it is strongly related to inflation forecasts and exchange rates. This relationship is similar to the one found in case of other developed countries. An increase in inflation forecast is followed by an even higher increase in nominal interest rates. The role of the exchange rate depends on the length of horizon: at a monthly frequency it is strongly related to interest rates. However, at a quarterly frequency – which is closer to the central bank’s policy horizon – the exchange rate effects interest rates mainly through its effect on inflation forecast.