Considerations for setting the medium-term inflation target
The medium-term inflation target set in summer 2005 and taking effect in January 2007 brings fundamental changes in the Hungarian inflation targeting mechanism. Whereas formerly the government and the central bank used to set a new inflation target each year, a 3-percent medium-term target will enter into effect from the above date onwards. The transition to the new mechanism was not self-evident, as both the former and the new regimes have their specific drawbacks and benefits. This article discusses these issues, arguing that the advantages of the new regime are far more important than its drawbacks and exceed the benefits of the old regime. In the current state of the Hungarian economy, a 3-percent inflation target can be deemed optimal on the medium term. The reason why it is slightly higher than the inflation targets of the countries with advanced economies is the catching-up nature of the Hungarian economy. The Hungarian inflation target is reviewed every three years, since the optimal level of inflation may change, and will probably decrease in Hungary over time. Another important date, when the inflation target will again be reviewed, will be Hungary’s prospective entry into the common European exchange rate mechanism (ERM-II). The article also explains that the inflation target has been defined as a point target, which, given the situation of Hungary, is more favourable than a target band, which is employed by many other countries.
References listed on IDEAS
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- Lars E. O. Svensson, 1999.
"How should monetary policy be conducted in an era of price stability?,"
Proceedings - Economic Policy Symposium - Jackson Hole,
Federal Reserve Bank of Kansas City, pages 195-259.
- Svensson, Lars E O, 1999. "How Should Monetary Policy Be Conducted In An Era Of Price Stability?," CEPR Discussion Papers 2342, C.E.P.R. Discussion Papers.
- Lars E.O. Svensson, 2000. "How Should Monetary Policy be Conducted in an Era of Price Stability?," NBER Working Papers 7516, National Bureau of Economic Research, Inc.
- Svensson, Lars, 1999. "How Should Monetary Policy Be Conducted in an Era of Price Stability," Seminar Papers 680, Stockholm University, Institute for International Economic Studies.
- Gergely Kiss & Judit Krekó, 2004. "Optimal Rate of Inflation in Hungary," MNB Background Studies (discontinued) 2004/1, Magyar Nemzeti Bank (Central Bank of Hungary).
- Frederic S. Mishkin & Adam S. Posen, 1997.
"Inflation targeting: lessons from four countries,"
Economic Policy Review,
Federal Reserve Bank of New York, issue Aug, pages 9-110.
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