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Exchange Rate Smoothing in Hungary

Author

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  • Péter Karádi

    () (New York University, USA)

Abstract

The paper proposes a structural empirical model capable of examining exchange rate smoothing in the small, open economy of Hungary. The framework assumes the existence of an unobserved and changing implicit exchange rate target. The central bank is assumed to use interest rate policy to obtain this preferred rate in the medium term, while market participants are assumed to form rational expectations about this target and influence exchange rates accordingly. The paper applies unobserved variable method – Kalman filtering – to estimate this implicit exchange rate target, and simultaneously estimate an interest rate rule and an exchange rate equation consistent with this target. The results provide evidence for exchange rate smoothing in Hungary by providing an estimated smooth implicit exchange rate target development and by showing significant interest rate response to the deviation of the exchange rate from this target. The method also provides estimates for the ceteris paribus exchange rate effects of expected and unexpected interest rate changes.

Suggested Citation

  • Péter Karádi, 2005. "Exchange Rate Smoothing in Hungary," MNB Working Papers 2005/06, Magyar Nemzeti Bank (Central Bank of Hungary).
  • Handle: RePEc:mnb:wpaper:2005/06
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    File URL: http://www.mnb.hu/letoltes/wp2005-6.pdf
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    Cited by:

    1. Anna Naszódi, 2007. "Are the Exchange Rates of EMU Candidate Countries Anchored by their Expected Euro Locking Rates?," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 115-134.
    2. 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.

    More about this item

    Keywords

    exchange rate smoothing; interest rate rules; Kalman filter;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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