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Reduction of External Vulnerability with Monetary Policy Tools
Renewal of the monetary policy instruments of the National Bank of Hungary (2014–2016)

Pál Péter Kolozsi
PhD, Head of Department, National Bank of Hungary

Mihály Hoffmann
Director, National Bank of Hungary

Published in: Public Finance Quarterly 2016/1 (p. 7-33.)

SUMMARY: The outbreak of the economic crisis in 2007–2008 changed the views about economic policy worldwide, in particular, the role, tasks and responsibility of monetary policy. Hungary was hit by the crisis in a particularly vulnerable state; therefore the aim of reducing external vulnerability was a central element of the transformation of economic policy. The Self-Financing Programme announced in 2014 by the National Bank of Hungary (MNB) served this particular objective by facilitating the reform of the central bank toolkit – in accordance with the authorisation received and the provisions set out in the MNB Act – the strengthening of financial stability and the reduction of external vulnerability. This study presents the transformation of the central bank toolkit and the benefits of the different measures, using the Mandl–Dierx–Ilzkovitz conceptual model. The conclusion drawn from the analysis is that the programme proved efficient in the technical and operative sense: indeed, starting from the spring of 2014, the debt management agency refinanced foreign currency debts borrowed from the market with forint issues, while banks’ portfolio of collateral securities increased and the central bank’s sterilisation portfolio diminished. The programme achieved its macroeconomic goals as well, as the foreign currency ratio of external funding and public debt has decreased and monetary conditions have eased, while the monetary transmission remained intact. In accordance with the announced actions of the MNB and the effective financing plan, self-financing will continue in 2016 as well.

KEYWORDS: monetary policy, monetary policy instruments, external vulnerability

E52, E58, H63, G21

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