The most important mechanism through which monetary policy affects the real economy in Hungary is the exchange rate channel. With euro adoption, this mechanism will largely disappear and the impact of monetary policy will be transmitted via the interest rate channel, presently seen as rather weak. This has raised concerns that the influence of monetary policy on the real economy in Hungary could be very limited after euro adoption. On top of this, other concerns have been voiced as regards potential asymmetries in the wage-setting behaviour, the exchange rate and credit channels. Based on the experience of today’s euro area participating countries and the structural characteristics of the Hungarian economy, this paper argues that after euro adoption 1) we may expect a broadening of the scope of the interest rate channel of monetary policy after euro adoption, 2) there are no institutional obstacles in the way of the effective functioning of the expectations channel in Hungary 3) substantially different monetary conditions from that in the euro area as a result of a different trade orientation are unlikely, and, finally 4) some asymmetries in the balance sheet channel may continue to exist for some time between Hungary and the core euro area countries but its effect will be significantly smaller after euro zone entry.
JEL Classification: E52, E58.
Keywords: monetary transmission mechanism, transmission channels, EMU participation