IT Framework in Hungary

Pierre L. SiklosWLU & Viessmann Research

CentreWaterloo ON CANADA

Institutional requirementsInstrument independenceEffective monetary policy instrumentAccountabilityDisclosureA floating exchange rateJoint responsibilityHarmony with fiscal policyPublic supportWell developed financial system

IT Desiderata: part I

IT Desiderata: Part II

Economic requirementsChoice of an appropriate price indexSelection of a width and horizon,and symmetry for the inflationtargetAdequate knowledge of thetransmission mechanism ofmonetary policyProvision of inflation forecastsAdequate measurement and timelyarrival of economic information

How Gradual?

Table 1 Inflation targets 

Target rates Reference period Date adopted

7% ±1 percentage point December 2001 June 2001

4.5% ±1 percentage point December 2002 June 2001

3.5% ±1 percentage point December 2003 December 2001

3.5% ±1 percentage point December 2004 October 2002

4% ±1 percentage point December 2005 October 2003

3.5% ±1 percentage point December 2006 November 2004

3% in 2007

IT in Hungary: Current State of Play

Institutional conditions: are they met? Status (ca. 2002) Status (ca. 2006)

Instrument independence? YES YESEffective policy instrument? YES YESAccountability? YES YES Adequate disclosure? YES YESExchange rate regime? YES ?Joint responsibility for YES ?monetary policy? Fiscal-monetary harmony? YES (in principle) ?

IT in Hungary: Current State of PlayPrice index for targeting? CPI inflation

“According to the findings of research carried by MNB staff, the optimal long-term level of inflation falls into the  2.3%–3.2% target

range” Width, horizon, symmetryof target bands? ±1% around a specified

mid-point of target bandSufficient knowledgeabout transmissionmechanism?

Dependent on choice ofexchange rate regime

Role of inflation forecast? Distribution of risks

around some centraltendency

Measurement, timelinessissues?

Largely met

Inflation

0

5

10

15

20

25

30

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

CPI inflationInflation objectiveReference value for inflationInflation expectations (Reuters)

Perc

ent p

er a

nnum

Exchange Rate

0

50

100

150

200

250

300

350

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

crawl rateFt/ euro exchange rateexchang rate band - bottomexchange rate band - midpointexchange rate band - topFo

rint/

euro

Exchange rate craw

l - depreciation rate

Maastricht on Their Minds

0

5

10

15

20

25

30

35

40

70

75

80

85

90

95

100

105

110

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Inflation differentialReal exchange rate (CPI based)

Infla

tion

diff

eren

tial (

HU

-EA

), pe

rcen

t per

ann

um

Real exchange rate (2000=

100)

Inflation Forecast RecordForecast Test Statistic Sample No. of

Observations

Reuters-InflationIT

110.04*-0.49 (0.32)

1997-2005 100

Consensus Inflation IT

3093.29*-0.27 (0.31)

1996-2005 107

Consensus Year Ahead InflationIT

1353.34*-0.33 (0.31)

1996-2005 107

Forecast Combination InflationIT

349.70*-0.38 (0.35)

1997-2005 100

GDP growth ConsensusIT

8.02**-1.13 (1.94)

1995-2005 106

GDP growth Year AheadIT

3.64-0.99 (1.96)

1996-2005 106

Real Time Problems I

80

85

90

95

100

105

110

1999:01 1999:07 2000:01 2000:07 2001:01 2001:07 2002:01

December 2000 vintageMarch 2002 vintage

94

96

98

100

102

104

1999:01 1999:07 2000:01 2000:07 2001:01

August 2005 vintageMarch 2002 vintage

Rea

l exc

hang

e ra

te (2

000=

100)

Rea

l exc

hang

e ra

te (1

994=

100)

Real Time Problems II

-2

-1

0

1

2

3

4

5

6

7

199619971998199920002001200220032004

Latest available (2005 Oct)August 2004 vintageAugust 2005 vintageMarch 2001 vintage

Perc

ent (ann

ualiz

ed)