Quantitative Analysis of Hungarian Monetary Policy After 1989

Abstract

This aim of this thesis is to analyze the effects of Hungary's monetary policy during the 1990s after the dissolution of the Soviet Union and the concomitant liberalization of Hungary, one of its allied economies. This study provides, via simultaneous equations, a model of inflation and GDP growth in Hungary during this important time period. The models show that the monetary regime, in which Hungary devalued its currency from 1995 through 2001 using a crawling peg approach, benefited its economy, especially from the outset. The central bank was able to exert greater control over growth and inflation using its interest rate, exchange rate, and expectations channels of monetary policy. However, results also show that this approach was overly conservative and prolonged, inasmuch as the currency was devalued for an excessive length of time. In the long run the data show a dragging effect of the devaluation on real GDP growth, and these devaluations did not improve the trade balance for the most of this period.