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The Hungarian Monetary Policy Model

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  • 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))

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    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.

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    Bibliographic Info

    Paper provided by Magyar Nemzeti Bank (the central bank of Hungary) in its series MNB Working Papers with number 2013/1.

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    Length: 56 pages
    Date of creation: 2013
    Date of revision:
    Handle: RePEc:mnb:wpaper:2013/1

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    Keywords: model projection; simulation; central banking; monetary policy;

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    References

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    1. Balázs Krusper, 2012. "The role of external and country specific factors in Hungarian inflation developments," MNB Working Papers 2012/5, Magyar Nemzeti Bank (the central bank of Hungary).
    2. Mazumder, Sandeep, 2014. "Determinants of the sacrifice ratio: Evidence from OECD and non-OECD countries," Economic Modelling, Elsevier, vol. 40(C), pages 117-135.
    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. Carlos Eduardo S. Gonçalves & Alexandre Carvalho, 2008. "Inflation Targeting and the Sacrifice Ratio," Revista Brasileira de Economia, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 62(2), pages 177-188, October.
    5. Laurence Ball, 1994. "What Determines the Sacrifice Ratio?," NBER Chapters, in: Monetary Policy, pages 155-193 National Bureau of Economic Research, Inc.
    6. 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 (the central bank of Hungary).
    7. 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.
    8. Zoltán M. Jakab & Balázs Világi, 2008. "An estimated DSGE model of the Hungarian economy," MNB Working Papers 2008/9, Magyar Nemzeti Bank (the central bank of Hungary).
    9. Adina Popescu & Alina Carare, 2011. "Monetary Policy and Risk-Premium Shocks in Hungary," IMF Working Papers 11/259, International Monetary Fund.
    10. Péter Gábriel, 2010. "Household inflation expectations and inflation dynamics," MNB Working Papers 2010/12, Magyar Nemzeti Bank (the central bank of Hungary).
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