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Explaining the Exchange Rate Pass-Through in Hungary: Simulations with the NIGEM Model

Author

Listed:
  • Zoltán M. Jakab

    () (Magyar Nemzeti Bank)

  • Mihály András Kovács

    () (Magyar Nemzeti Bank)

Abstract

This paper explores the major determinants of the exchange rate pass-through to CPI. The simulations were performed with the Bank's estimated Hungarian block linked to the NIGEM model of the National Institute of Economic and Social Research (NIESR). The modelling framework offers some insight into the role of different markets in the price-exchange rate relationship. The paper gives an analysis of the relative importance of expectations, goods and labour market parameters. Our results show that the contribution of goods and labour market parameters to explaining the economy-wide exchange rate pass-through changes over time. While goods market adjustment is significant from the start of an exchange rate shock, the labour market starts to gain importance only from year three and onwards. More specifically, the effect of mark-up adjustment prevails over the whole horizon, which indicates that it is the most significant channel in exchange rate pass-through. The slow appearance of labour market effects might be explained by the presence of nominal wage rigidities, which make the adjustment in quantities faster. These results may explain the current labour market behaviour seen after the introduction of the inflation-targeting regime in Hungary. Hence we argue that the exchange rate shock in 2001 is still too close in time to draw conclusions on the role of labour market rigidities in Hungary.

Suggested Citation

  • Zoltán M. Jakab & Mihály András Kovács, 2003. "Explaining the Exchange Rate Pass-Through in Hungary: Simulations with the NIGEM Model," MNB Working Papers 2003/5, Magyar Nemzeti Bank (Central Bank of Hungary).
  • Handle: RePEc:mnb:wpaper:2003/5
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    Citations

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    Cited by:

    1. Balázs Égert & Ronald MacDonald, 2006. "Monetary Transmission Mechanism in Transition Economies: Surveying the Surveyable," MNB Working Papers 2006/5, Magyar Nemzeti Bank (Central Bank of Hungary).
    2. Jérôme Creel & Sandrine Levasseur, 2004. "How would a fixed-exchange-rate regime fit the transition economies?. The cases of the Czech Republic, Hungary and Poland," Revue de l'OFCE, Presses de Sciences-Po, vol. 91(5), pages 83-120.
    3. Coricelli, Fabrizio & Égert, Balázs & MacDonald, Ronald, 2006. "Monetary transmission mechanism in Central and Eastern Europe : gliding on a wind of change," BOFIT Discussion Papers 8/2006, Bank of Finland, Institute for Economies in Transition.
    4. Balazs Vonnak, 2008. "The Hungarian monetary transmission mechanism: an assessment," BIS Papers chapters,in: Bank for International Settlements (ed.), Transmission mechanisms for monetary policy in emerging market economies, volume 35, pages 235-257 Bank for International Settlements.
    5. Zoltán M. Jakab & Viktor Várpalotai & Balázs Vonnák, 2006. "How does monetary policy affect aggregate demand? A multimodel approach for Hungary," MNB Working Papers 2006/4, Magyar Nemzeti Bank (Central Bank of Hungary).
    6. BIRMAN Andrei, 2012. "A VAR Analysis on the Monetary Policy Transmission Mechanism in Romania," European Journal of Interdisciplinary Studies, Bucharest Economic Academy, issue 01, March.

    More about this item

    Keywords

    Inflation; Exchange rate; Pass-through; Modelling; Transition economies.;

    JEL classification:

    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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