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Macroeconomic Risks and Monetary Policy in Central European Countries: Parallels in the Czech Republic, Hungary, and Poland

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  • István Ábel

    (Finance Department, Faculty of Accounting and Finance, Budapest Business University, Buzogany u. 10-12, H-1149 Budapest, Hungary)

  • Pierre Siklos

    (Balsillie School of International Affairs, Wilfrid Laurier University, Waterloo, ON N2L 3C5, Canada)

Abstract

Changes in interest rates, inflation, and exchange rates are the main components of macroeconomic risks (financial risks) in projects evaluation. However, the conduct of monetary policy as well as its impact on the economic environment is seldom considered as an important component of macroeconomic risks. In this paper, we offer a simple framework to analyze the conduct of monetary policy. We examine the stabilizing properties of monetary policy, its impact, and the parallels in the monetary policy approaches taken in the Czech Republic, Hungary, and Poland until the pandemic. We provide a simple theoretical background to motivate the main elements of the debate and the choice of policy strategy. We then rationalize the adoption of a form of flexible inflation targeting (FIT). It is characterized by an explicit concern over exchange rates. The empirical evidence, consisting of calibrated and extended Taylor rules, together with local projections estimates, suggests that monetary policy has been practiced with considerable flexibility by all three central banks and has contributed to business cycle stabilization in the region. Most notably, the exchange rate plays an important role in the conduct of monetary policy.

Suggested Citation

  • István Ábel & Pierre Siklos, 2023. "Macroeconomic Risks and Monetary Policy in Central European Countries: Parallels in the Czech Republic, Hungary, and Poland," Risks, MDPI, vol. 11(11), pages 1-26, November.
    • Handle: RePEc:gam:jrisks:v:11:y:2023:i:11:p:200-:d:1281101
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