The Hungarian Monetary Transmission Mechanism: an Assessment

This paper attempts to aggregate and summarise fresh results concerning the monetary transmission mechanism in Hungary. Within a research project at the MNB nine studies have been published investigating the channels through which Hungarian monetary policy affects the economy. We create a framework for synthesising particular results based on Mishkin’s (1996) classification. We analyse how aggregate demand is affected through those channels. Our conclusion is that during the past ten years monetary policy did exert a measurable influence on real activity and prices. The dominance of the exchange rate channel explains why prices respond faster and output responds more mildly than in closed developed economies like the U.S. or the euro area. We expect that after adopting the euro the absence of exchange rate will be compensated by the fact that the interest rate channel will work through foreign demand as well. Therefore, no significant asymmetries can be expected inside the euro area in terms of monetary transmission.