This paper assesses the effect of monetary policy on major components of aggregate demand. We use three different macromodels, all estimated on Hungarian data of the past 10 years. All three models indicated that after an unexpected monetary policy tightening investments decrease quickly. The response of consumption is more ambiguous, but it is most likely to increase for several years, which may be explained by the slow adjustment of nominal wages. On the other hand, we could not detect any significant change in net exports during the first couple of years after the shock. The weak response of net exports can be due to the fact that the drop in exports is coupled with a fall in imports of almost the same magnitude, highlighting the relative importance of the income-absorption effect, as opposed to the expenditure-switching effect.
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Paper provided by Magyar Nemzeti Bank (The Central Bank of Hungary) in its series MNB Working Papers with number
2006/4.
Find related papers by JEL classification: E20 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data) E27 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
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