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Neutral interest rate in Hungary

Author

Listed:
  • Dániel Baksa

    (OGResearch)

  • Dániel Felcser

    (Magyar Nemzeti Bank (the central bank of Hungary))

  • Ágnes Horváth

    (Magyar Nemzeti Bank (the central bank of Hungary))

  • Norbert Kiss M.

    (Magyar Nemzeti Bank (the central bank of Hungary))

  • Csaba Köber

    (Magyar Nemzeti Bank (the central bank of Hungary))

  • Balázs Krusper

    (Magyar Nemzeti Bank (the central bank of Hungary))

  • Gábor Dániel Soós

    (Magyar Nemzeti Bank (the central bank of Hungary))

  • Katalin Szilágyi

    (OGResearch)

Abstract

Central banks primarily achieve their inflation targets by changing their key instrument, the central bank base rate, to the required extent and with careful timing. If the inflation outlook deteriorates and the forward-looking inflation rate exceeds the target, monetary policy raises interest rates to cool the economy and reduce inflation. In the opposite scenario, the bank cuts interest rates to stimulate the economy and raise inflation. In order to decide whether the prevailing rate of interest stimulates or slows the economy, it is necessary to know where the interest rate threshold is for expansionary versus contractionary monetary policy. We call this point of reference the neutral interest rate or the natural rate of interest. Similar to potential output, the neutral interest rate is a theoretical equilibrium concept, not an observable variable. It is therefore difficult to grasp empirically and its point estimation is surrounded with a great degree of uncertainty. This essay looks at the individual factors influencing the neutral interest rate and gives an estimate for the range in which it may move in Hungary.

Suggested Citation

  • Dániel Baksa & Dániel Felcser & Ágnes Horváth & Norbert Kiss M. & Csaba Köber & Balázs Krusper & Gábor Dániel Soós & Katalin Szilágyi, 2013. "Neutral interest rate in Hungary," MNB Bulletin (discontinued), Magyar Nemzeti Bank (Central Bank of Hungary), vol. 8(Special), pages 7-13, October.
    • Handle: RePEc:mnb:bullet:v:8:y:2013:i:special:p:7-13
    as

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    File URL: http://www.mnb.hu/letoltes/baksa-felcser-horvath-kissm-kober-krusper-soos-szilagyi.pdf
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    References listed on IDEAS

    as
    1. Mesonnier, Jean-Stephane & Renne, Jean-Paul, 2007. "A time-varying "natural" rate of interest for the euro area," European Economic Review, Elsevier, vol. 51(7), pages 1768-1784, October.
    2. Julien Garnier & Bjørn-Roger Wilhelmsen, 2005. "The natural real interest rate and the output gap in the euro area: A joint estimation," Working Paper 2005/14, Norges Bank.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Harendra Behera & Sitikantha Pattanaik & Rajesh Kavediya, 2015. "Natural Interest Rate: Assessing the Stance of India’s Monetary Policy under Uncertainty," Working Papers id:7654, eSocialSciences.
    2. István Ábel & Orsolya Csortos & Kristóf Lehmann & Annamária Madarász & Zoltán Szalai, 2014. "Inflation targeting in the light of lessons from the financial crisis," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 13(4), pages 35-56.

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    More about this item

    Keywords

    neutral interest rate; natural rate of interest; monetary policy stance; Hungary;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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