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Financial liberalisation – The dilemmas of national adaptation


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  • István Magas

    (Corvinus University of Budapest)

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    This study explores two of the main issues of global financial processes: the economic essence of the benefits gained from the increased liberalisation of international capital flow, and the issue of “adequate” exchange rate systems as closely aligned with the increased international capital flow as possible. Conclusions are in part theoretical and in part practical. The study confirms the statement that the liberalisation of capital flow and the exchange rate policy to be realised continue to be highly problematic to this day. There is no uniform and theoretically well-grounded position that could properly describe the liberalization of capital transactions or the adequate exchange system to be implemented from all possible angles. The so-called ‘impossible trinity’, the peculiar difficulty of the simultaneous following of foreign and domestic goals is increasingly present in small open economies such as the Hungarian economy for example. Due to the high degree of international financial integration, domestic and foreign loan demand and upturn cannot be regulated by such traditional tools as interest and fiscal economy stimulating measures, that is, by such simultaneous measures as point in the same direction and do not act against one another. This is increasingly reflected in Hungary by the difficulties encountered in the country’s interest policy and HUF and foreign currency lending. At the same time, current economic policy cannot shy away from the obligation to find a balance between domestic and external goals that can be maintained in a changing global financial environment. However, there is no “royal road” for economic policy. This statement is true for the role played by the central bank as well, which is aimed at the management of banking system-level risks caused by the inflated Hungarian foreign currency debt.

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    Bibliographic Info

    Article provided by State Audit Office of Hungary in its journal Public Finance Quarterly.

    Volume (Year): 56 (2011)
    Issue (Month): 2 ()
    Pages: 214-240

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    Handle: RePEc:pfq:journl:v:56:y:2011:i:2:p:214-240

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    Keywords: financial liberalisation; international capital flow; exchange rate system; exchange rate policy; loan demand; forintdenominated; loans; foreign currency-denominated loans;

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    1. Olivier J. Blanchard, 1991. "Current and Anticipated Deficits, Interest Rates and Economic Activity," NBER Chapters, in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 361-390 National Bureau of Economic Research, Inc.
    2. Maurice Obstfeld & Alan M. Taylor, 2002. "Globalization and Capital Markets," NBER Working Papers 8846, National Bureau of Economic Research, Inc.
    3. Fabian Valencia & Luc Laeven, 2008. "Systemic Banking Crises: A New Database," IMF Working Papers 08/224, International Monetary Fund.
    4. Pablo Guerron & Martin Uribe & Juan Rubio-Ramirez & Jesus Fernandez-Villaverde, 2010. "Risk Matters: The Real Effects of Volatility Shocks," 2010 Meeting Papers 281, Society for Economic Dynamics.
    5. Valentinyi, Ákos & Bihari, Péter, 2010. "Pirruszi dezinfláció vagy tartósan alacsony inflációs környezet?
      [Pyrrhic deflation or a persistently low-inflation environment?]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(10), pages 868-875.
    6. Laszlo Csaba, 2011. "Financial institutions in transition: the long view," Post-Communist Economies, Taylor & Francis Journals, vol. 23(1), pages 1-13.
    7. Erdős, Tibor, 2010. "Forintárfolyam, kamatszint és devizaalapú eladósodás. Az árfolyam szerepéről
      [Forint exchange rates, interest levels and foreign currency-based debt. The role of the exchange rate]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(10), pages 847-867.
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