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MONETARY POLICY IN HUNGARY May 2000 Produced by staff members of the Monetary Policy Department of the National Bank of Hungary Edited by: Ilona Bozó The publication presents an overview of the monetary policy of the National Bank of Hungary. This, however, does not preclude the manifestation of personal views of the authors in certain chapters. These do not necessarily reflect the official standpoint of the NBH. Produced by the Monetary Policy Department of the National Bank of Hungary Headed by György Sándor, Managing Director Published by the Secretariat of the National Bank of Hungary Publisher in charge: Dr. József Kajdi Translated by Németh & Pásztor International Kft Design typography and typesetting by the Publications Group of the Information Division 1850 Budapest, V. Szabadság tér 8–9. Internet: http://www.mnb.hu ISBN: 963 9057 72X CONTENTS FOREWORD .................................... 5 I. THE ROLE OF THE CENTRAL BANK IN HUNGARY A BRIEF HISTORY OF THE NATIONAL BANK OF HUNGARY (Ilona Bozó, József Szabó ) ............................. 9 The Austrian National Bank and the Austro-Hungarian Bank.......... 9 The Independent Hungarian Central Bank ................... 11 Preparations ................................ 11 From the Foundation of the NBH until the Second World War ....... 12 Shift to a Command Economy ....................... 13 The Central Bank in the Period of the Socialist Command Economy ...... 13 The Transformation of the National Bank of Hungary and the Banking Sector in 1987................................... 15 THE ROLE OF THE NATIONAL BANK OF HUNGARY IN THE FINANCIAL SYSTEM (Ilona Bozó, Zsolt Érsek, József Szabó , Henrik Tóth) .............. 17 The Functions and Role of the Central Bank in the Financial System...... 17 Issue of Banknotes and Coins ....................... 19 The Central Bank as the Banker of banks ................. 20 The Lender of Last Resort Function .................... 21 The Central Bank as the Government’s banker............... 23 Foreign Exchange Reserve Management at the NBH ............ 25 The Regulatory Function .......................... 27 Bank Supervision.............................. 29 Maintenance of the Payment System .................... 30 Statistics .................................. 34 Organisational Structure and Decision-Making ................. 35 The Bodies of the NBH Defined by the Act on the Central Bank ...... 35 Central Bank Independence .......................... 38 The Importance of Independence...................... 38 Personal Independence........................... 39 Operational Independence ......................... 40 Financial Independence .......................... 41 The Requirement of Transparency in Central Banks ............ 42 MONETARY POLICY IN HUNGARY 3 II. THE OBJECTIVES OF MONETARY POLICY AND ITS IMPACT ON THE ECONOMY THE OBJECTIVES OF MONETARY POLICY (Áron Gereben, Zsolt Kondrát) .... 45 The Ultimate Goal of Monetary Policy ..................... 45 Price Stability versus Economic Growth .................. 47 The Ultimate Goal of Hungarian Monetary Policy.............. 49 Intermediate Targets .............................. 51 The Hierarchy of Objectives ........................ 51 The Intermediate Target of the NBH .................... 53 The Lower Level of the Set of Objectives .................... 56 The Operating Target of the NBH ..................... 57 INDICATORS (Gyula Barabás, Emma Boros, Csaba Horváth, Anna Kerekes) ... 59 Monetary Aggregates.............................. 59 Credit Aggregates and the Net Financing Capacity............... 62 The Information Content of the Yield Curve for Monetary Policy ........ 63 MONETARY TRANSMISSION (András Kármán) .................. 68 The Channels of Monetary Transmission .................... 68 Interest Rate Transmission ........................... 71 The Effectiveness of Transmission ..................... 71 The Effectiveness of Interest Rate Transmission in Hungary ........ 72 The Interest Rate Policy of the NBH .................... 73 Transmission Along the Yield Curve .................... 75 III. THE INSTRUMENTS OF MONETARY POLICY A HISTORICAL OVERVIEW OF THE DEVELOPMENT OF THE INSTRUMENTS (Ilona Bozó) .................................... 81 The Use of Direct Monetary Instruments .................... 81 Money Market Development—Use of Indirect Instruments ........... 83 THE OPERATION OF THE INSTRUMENTS TODAY (Ilona Bozó, Tamás Glanz, Henrik Tóth) .................................. 87 Foreign Exchange Market Intervention ..................... 87 The Operation of the Forint Instruments .................... 88 Reserve requirement system ........................ 89 The Basic Set of Current Central Bank Instruments ............ 94 Interest Rate Corridor............................ 97 The Policy Instrument ........................... 99 The Instruments of Sterilisation....................... 101 Liquidity Planning and Fine-Tuning (Quick Tender) ............ 104 Individual Elements in Operating the Instruments ............. 111 BIBLIOGRAPHY .................................. 113 ANNEX....................................... 115 GLOSSARY .................................... 117 INDEX ....................................... 129 4 NATIONAL BANK OF HUNGARY FOREWORD Hungary’s transition to a market economy has by now essentially come to an end. The judicious conduct of monetary policy has been an important factor in help- ing the economy develop along a balanced and sustain- able path. he National Bank of Hungary (NBH) re- households, have a good understanding of Tlies on an established and properly func- our intentions and of the conditions for the tioning set of instruments in the pursuit of its achievement of our objectives of maintain- monetary policy objectives. The success of ing economic equilibrium and reducing in- monetary policy depends, however, not only flation. Transparency and predictability im- on the instruments available to the central prove the effectiveness of monetary policy, bank and the experience gained in using because they enable economic agents to these instruments. External shocks and the anticipate monetary policy actions and cal- economy’s ability to withstand them, the culate with their effects in their economic stability of the financial sector and the matu- decisions. rity of the money and capital markets are To ease finding their way and with an equally important factors which influence intention of providing a compass, we annu- and constrain monetary policy decision- ally present the Monetary Policy Guidelines making. to the public in general and to Parliament in Hungary has coped successfully with particular. The NBH regularly publishes its the challenges of economic transition. The Inflation Report. Communications disclosed economy is now growing at a relatively fast about specific steps of the Central Bank and rate, inflation is declining steadily and the communiqués issued after meetings of the current account deficit is at a manageable Central Bank Council are discussed exten- level. Monetary policy has promoted this sively by the press. Once approved by its process through the deployment of mone- General Meeting, the NBH presents its An- tary policy instruments which have sup- nual Report to Parliament. Nevertheless, we ported Hungary’s fixed exchange rate re- feel that this publication, which focuses not gime. on the peculiarities of the momentary situa- tion but on the operating framework and the The expert deployment of monetary general features of the Central Bank instru policy instruments is a necessary, but not - sufficient condition for the effective func- ments, fills a vacuum. tioning of the transmission mechanism of This publication, Monetary Policy in monetary policy. An equally important fac- Hungary, was compiled by members of the tor is that economic agents, ranging from Monetary Policy Department of the NBH, professional financial organisations to who themselves are party to the everyday MONETARY POLICY IN HUNGARY 5 workings of monetary policy, decision sup- tion first and foremost to readers interested port activities and the formation and opera- in the subject matter of this publication. tion of the set of applied instruments. This is I trust that, in its own way, this hand- intended as a summary based on practical book will render the transmission mecha- experience which, by virtue of its very sub- nism of monetary policy smoother and, al- ject, cannot in all of its parts be regarded as beit indirectly, may contribute to the future easy reading. While required to report on its development of the Hungarian economy. activities to society at large, the National Bank of Hungary desires to provide informa- Werner Riecke 6 NATIONAL BANK OF HUNGARY I. THE ROLE OF THE CENTRAL BANK IN HUNGARY I. THE ROLE OF THE CENTRAL BANK IN HUNGARY MONETARY POLICY IN HUNGARY 7 I. THE ROLE OF THE CENTRAL BANK IN HUNGARY 8 NATIONAL BANK OF HUNGARY A BRIEF HISTORY OF THE NATIONAL BANK OF HUNGARY1 lthough historically the Sweden’s control by setting up an independent gov- ASveriges Riksbank, established in 1668, ernment’s banker. is the oldest central bank, institutions acting The Austrian National Bank (ANB), es- as the government’s banker came into being tablished by the Emperor’s patent on 1 June all over Europe, modelled in general on the 1816, was “a patented private institution Bank of England, which was established in under the special protection of public ad- 1694. ministration”2 whose business relations to On the continent, the Austrian central the state
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