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Chronic Moderate Inflation in Transition: The Tale of Hungary

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  • Janos Vincze

Abstract

In this study I examine two aspects of Hungarian inflation. with some reference to other CEFE. The first is the political economy dimension, the second the mechanics of price making Concerning the former topic I argue that the balance of payment or mercantilistic motive has been the single most important determinant of Hungarian macroeconomic policy. With respect to the second I elaborate on two (interrelated) issues: I make the claim that the nominal exchange rate is in fact a nominal anchor to inflation in a certain sense, and I try to clarify the role of relative price changes. The outcome of the Investigation has important consequences on disinflation policies. The political economy thesis implies that without reducing foreign debt to comfortable levels disinflation will be awkward in either a fixed or a flexible exchange rate regime. To achieve price stability, at least initially, targeting the nominal exchange rate seems to be the most viable alternative, though this should be done in a manner different from the current system of preanounced crawling bands. Relative price developments should be taken into account when numerical parameters are rendered to the policy.

Suggested Citation

  • Janos Vincze, 1998. "Chronic Moderate Inflation in Transition: The Tale of Hungary," William Davidson Institute Working Papers Series 176, William Davidson Institute at the University of Michigan.
  • Handle: RePEc:wdi:papers:1998-176
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