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The Hungarian Monetary Policy Model

Author

Listed:
  • Katalin Szilágyi

    (Magyar Nemzeti Bank (central bank of Hungary))

  • Dániel Baksa

    (Magyar Nemzeti Bank (central bank of Hungary))

  • Jaromir Benes

    (International Monetary Fund)

  • Ágnes Horváth

    (Magyar Nemzeti Bank (central bank of Hungary))

  • Csaba Köber

    (Magyar Nemzeti Bank (central bank of Hungary))

  • Gábor D. Soós

    (Magyar Nemzeti Bank (central bank of Hungary))

Abstract

March 2011 marked the introduction of the Magyar Nemzeti Bank’s Monetary Policy Model (MPM), representing a paradigm shift in both macroeconomic projection and monetary policy decision support. In contrast to previous conditional projections, the MPM provides an endogenous definition of both the projected policy rate and the projected exchange rate. Given the forward-looking nature of the model, expectations of economic agents play a key role in the monetary transmission process; therefore, the future achievement of the inflation target is guaranteed by the projected path of the interest rate over the forecast horizon. In this paper, we discuss the underlying structure and logic behind the MPM, describe the key behavioural equations and examine how the channels of monetary transmission appear in the model. In addition, we present the empirical validation process in detail from calibration, through Bayesian estimation and discussion of the economic properties of the model to the historical projection exercise. Finally, we discuss the main challenges we faced during the first year of application.

Suggested Citation

  • Katalin Szilágyi & Dániel Baksa & Jaromir Benes & Ágnes Horváth & Csaba Köber & Gábor D. Soós, 2013. "The Hungarian Monetary Policy Model," MNB Working Papers 2013/1, Magyar Nemzeti Bank (Central Bank of Hungary).
    • Handle: RePEc:mnb:wpaper:2013/1
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    References listed on IDEAS

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    1. Ms. Adina Popescu & Ms. Alina Carare, 2011. "Monetary Policy and Risk-Premium Shocks in Hungary: Results from a Large Bayesian VAR," IMF Working Papers 2011/259, International Monetary Fund.
    2. Adolfson, Malin & Laséen, Stefan & Lindé, Jesper & Villani, Mattias, 2008. "Evaluating an estimated new Keynesian small open economy model," Journal of Economic Dynamics and Control, Elsevier, vol. 32(8), pages 2690-2721, August.
    3. Pellényi, Gábor, 2012. "A monetáris politika hatása a magyar gazdaságra. Elemzés strukturális, dinamikus faktormodellel [The sectoral effects of monetary policy in Hungary: a structural factor]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(3), pages 263-284.
    4. Laurence Ball, 1994. "What Determines the Sacrifice Ratio?," NBER Chapters, in: Monetary Policy, pages 155-193, National Bureau of Economic Research, Inc.
    5. Szilárd Benk & Zoltán M. Jakab & Mihály András Kovács & Balázs Párkányi & Zoltán Reppa & Gábor Vadas, 2006. "The Hungarian Quarterly Projection Model (NEM)," MNB Occasional Papers 2006/60, Magyar Nemzeti Bank (Central Bank of Hungary).
    6. Mazumder, Sandeep, 2014. "Determinants of the sacrifice ratio: Evidence from OECD and non-OECD countries," Economic Modelling, Elsevier, vol. 40(C), pages 117-135.
    7. Péter Gábriel, 2010. "Household inflation expectations and inflation dynamics," MNB Working Papers 2010/12, Magyar Nemzeti Bank (Central Bank of Hungary).
    8. Zoltán M. Jakab & Balázs Világi, 2008. "An estimated DSGE model of the Hungarian economy," MNB Working Papers 2008/9, Magyar Nemzeti Bank (Central Bank of Hungary).
    9. Balázs Krusper, 2012. "The role of external and country specific factors in Hungarian inflation developments," MNB Working Papers 2012/5, Magyar Nemzeti Bank (Central Bank of Hungary).
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    Citations

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    Cited by:

    1. South African Reserve Bank, 2017. "Occasional Bulletin of Economic Notes 2017/03," Working Papers 8057, South African Reserve Bank.
    2. Tamás Ilyés & Lóránt Varga, 2015. "A General Equilibrium Approach of Retail Payments," MNB Working Papers 2015/3, Magyar Nemzeti Bank (Central Bank of Hungary).
    3. Eric Schaling & Kgotso Morema, 2022. "Optimalinterestrategapsforflexibleinflationtargeting," Working Papers 11037, South African Reserve Bank.
    4. Magda Ciżkowicz-Pękała & Witold Grostal & Joanna Niedźwiedzińska & Elżbieta Skrzeszewska-Paczek & Ewa Stawasz-Grabowska & Grzegorz Wesołowski & Piotr Żuk, 2019. "Three decades of inflation targeting," NBP Working Papers 314, Narodowy Bank Polski.
    5. Ádám Banai & Zsuzsanna Hosszú & Gyöngyi Körmendi & Bence Mérõ, 2014. "Impact of base rate cuts on bank profitability," MNB Bulletin (discontinued), Magyar Nemzeti Bank (Central Bank of Hungary), vol. 9(2), pages 18-22, July.
    6. Jan Filacek & Ivan Sutoris, 2019. "Inflation Targeting Flexibility: The CNB's Reaction Function under Scrutiny," Research and Policy Notes 2019/02, Czech National Bank.

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    More about this item

    Keywords

    model projection; simulation; central banking; monetary policy;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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