Exchange Rate Smoothing in Hungary

The paper proposes a structural empirical model capable of examining exchange rate smoothing in the small, open economy of Hungary. The framework assumes the existence of an unobserved and changing implicit exchange rate target. The central bank is assumed to use interest rate policy to obtain this preferred rate in the medium term, while market participants are assumed to form rational expectations about this target and influence exchange rates accordingly. The paper applies unobserved variable method – Kalman filtering – to estimate this implicit exchange rate target, and simultaneously estimate an interest rate rule and an exchange rate equation consistent with this target. The results provide evidence for exchange rate smoothing in Hungary by providing an estimated smooth implicit exchange rate target development and by showing significant interest rate response to the deviation of the exchange rate from this target. The method also provides estimates for the ceteris paribus exchange rate effects of expected and unexpected interest rate changes.exchange rate smoothing, interest rate rules, Kalman filter

Rethinking Business Cycle Models – Workshop at the MNB

‘DSGE Models: A Closer Look at the Workhorse of Macroeconomics’ was the title of the international workshop organised for the 8th time by the Magyar Nemzeti Bank (MNB) jointly with the London-based Center for Economic Policy Research on 3-4 September 2009. The recent sub-prime debacle, the resulting financial meltdown and the substantial policy responses gave the topicality of the event; even more so as the unexpected extent of the crisis stirred a heated debate within and outside the economics profession about the applicability and usefulness of the current business cycle models.2 The keynote speakers of the event were professors Lawrence Christiano (Northwestern University) and Mark Gertler (New York University, NYU), who are both world-renowned for their essential and continuing contributions to the development of the current versions of business cycle models. The keynote speakers with the 15 presenters from 10 countries and their discussants provided important attempts to challenge or defend basic assumptons of the models (e.g. sticky developments in prices or rational and forward-looking expectations); argue for adding long missing factors (e.g. an explicit financial sector and imperfect credit markets) to the models, or for dropping others (e.g. money-demand) which seem non-essential. There was general agreement among the participants with Governor of the MNB András Simor, who said that in the current crisis ‘we need [models of business cycles] more than ever,’ but they need to be developed further to be able to analyse and quantify factors that the current crisis showed essential.business cycle models, learning, price stickiness, optimal monetary policy, emerging market business cycles, estimation, country portfolios.

Inflation asymmetry, menu costs and aggregation bias – A further case for state dependent pricing

Asymmetric inflation response to aggregate shocks is an identifying macro-prediction of state dependent pricing models with trend inflation (Ball and Mankiw, 1994). The paper uses the natural experiment of symmetric value-added tax (VAT) changes in Hungary with highly asymmetric inflation responses to provide further evidence for state-dependent pricing and for the Ball-Mankiw conjecture. The paper shows, furthermore, that while a standard menu cost model like that of Golosov and Lucas (2007) underestimates the observed asymmetry, a model of multi-product firms that takes sectoral heterogeneity explicitly into consideration can quantitatively account for the inflation asymmetry observed in the data. This aggregation bias of the standard model is the result of the strong interaction term between trend inflation and menu costs in determining asymmetry in the model, and the positive correlation between sectoral inflation rates and menu costs in the data. The paper implies that the real effects of negative monetary shocks can be substantial even in the standard Golosov and Lucas (2007) model if these additional factors are taken into consideration.aggregation bias, inflation asymmetry, menu cost, sectoral heterogeneity, value-added tax

A Spatial Explanation for the Balassa-Samuelson Effect

We propose a simple spatial model to explain why the price level is higher in rich countries. There are two sectors: manufacturing, which is freely tradable, and non-tradable services, which have to locate near customers in big cities. As countries develop, total factor productivity increases simultaneously in both sectors. However, because services compete with the population for scarce land, labor productivity will grow slower in services than in manufacturing. Services become more expensive, and the aggregate price level becomes higher. The model hence provides a theoretical foundation for the Balassa--Samuelson assumption that productivity growth is slower in the non-tradable sector than in the tradable sector. Empirical results confirm two key implications of the theory. First, we compare countries where land is scarce (densely populated, highly urban countries) to rural countries. The Balassa--Samuelson effect is stronger among urban countries. Second, we compare sectors that locate at different distance to consumers. The Balassa--Samuelson effect is stronger within sectors that locate closer to consumers.

Structural challenges towards the euro: fiscal policy

Broad theoretical consensus and vast empirical evidence reinforce the view that prudent fiscal policy – also advocated by the fiscal institutions of the eurozone – can support the stable long term growth. After presenting some general principles of the optimal fiscal policy, the paper analyses the questions of fiscal convergence necessary for the successful eurozone entry and membership of Hungary. The paper calculates the consolidation necessary to reach the 2008 deficit target set by the Convergence Program. Taking into account of not only the level of the government debt but also the relatively progressed state of the interest rate convergence, the potential reduction attainable in the interest balance is moderate. The main result of the paper is that the necessary consolidation measures are required to reduce the primary balance by approximately 3 percent. In case of cutting public expenditure it would require approximately 4 percent reduction taking into account the revenue content of those expenditures. The structure of macroeconomic growth is not expected to facilitate fiscal consolidation – as wage and consumption growth, which have major influence on the development of relevant tax-bases, are expected to be moderate – and no improvements in the balance are expected as a result of the EU accession. International experience, especially fiscal consolidations of eurozone member states, however, show that structural – i.e. quality-improving and sustainable – measures and the reform of the institutional framework are essential determinants of successful consolidations. Temporary measures and deficit reductions by creative accounting do not foster macroeconomic stabilization and their eventual reversal is highly probable.Fiscal Consolidation, Optimal Debt Policy, Maastricht Criteria.

A Spatial Explanation for the Balassa-Samuelson Effect *

Abstract We propose a simple spatial model to explain why the price level is higher in rich countries. There are two sectors: manufacturing, which is freely tradable, and nontradable services, which have to locate near customers in big cities. As countries develop, total factor productivity increases simultaneously in both sectors. However, because services compete with the population for scarce land, labor productivity will grow slower in services than in manufacturing. Services become more expensive, and the aggregate price level becomes higher. The model hence provides a theoretical foundation for the Balassa-Samuelson assumption that productivity growth is slower in the non-tradable sector than in the tradable sector. Empirical results confirm two key implications of the theory. First, we compare countries where land is scarce (densely populated, highly urban countries) to rural countries. The Balassa-Samuelson effect is stronger among urban countries. Second, we compare sectors that locate at different distance to consumers. The Balassa-Samuelson effect is stronger within sectors that locate closer to consumers

A renin-angiotenzin-aldoszteron rendszer és a karbonil stressz szerepe a metabolikus syndroma és az általa okozott vesebetegség kialakulásában = Role of renin-angiotensin-aldosterone axis and carbonyl stress in the development of the metabolic syndrome and in its nephropathy

Az ACE és a glutation peroxidáz gén polimorfizmusa összefüggést mutat a metabolikus szindróma súlyosságával, és az oxidatív stressz mértékével. A karbonil stressz egyik forrásaként ismert dohányfüst a metabolikus szindróma pathogenezisében fontos szerepet játszó endothel funkciót károsítja. Az agyat ért karbonil stressz metabolikus szindrómára jellegzetes klinikai kép kialakulásához vezet. A metabolikus szindrómás állatok veséjében a karbonil stressz végtermékei és a renin kolokalizációt mutat. Izolált vörösvértestekben a karbonil stressz fokozott oxidatív stresszt okoz. A karbonil-stresszel járó diabeteszes glükózuria a vese tubuláris sejtjeiben hidroxil szabadgyök- termeléshez vezet. Az oxidatív stressz fontos szerepet játszik a diabeteszes cataracta, a diabeteszes mikroalbuminuria kialakulásában és mértéke összefügg a diabeteszes érkárosodás mértékével. A karbonil és oxidatív stressz hatására képződő glikációs végtermékek szintje a halálozás független prediktora. Diabeteszes betegekben az inzulinkezelés megkezdése csökkentette az oxidatív stresszt, és javította az endothelfunkciót. Kidolgoztuk az ACE-inhibítorok és az angiotenzin receptor blokkolók kombinálásának ajánlását a diabeteszes nephropathia kezelésében. Diabeteszes betegekben az antioxidáns rezveratrol javította a szénhidrátháztartást. A diabeteszes nephropathiában korán jelentkező anaemia hátterében álló erythropoetin-rezisztenciát az antioxidáns dózisban adott acetilszalicilsavval sikerült áttörnünk. | We have shown, that ACE and glutathion peroxidase gene polymorphisms have an effect on the severity of the metabolic syndrome and on the level of oxidative stress. Smoking, a known source of carbonyl stress causes endothelial dysfunction, which plays a crucial role in the pathogenesis of metabolic syndrome. Carbonyl stress in the brain leads to the development of a clinical picture characteristic for metabolic syndrome. In the kidneys of the animals with metabolic syndrome the end-products of carbonyl stress show co-localisation with renin. Carbonyl stress causes increased oxidative stress in isolated red blood cells. Diabetic glucoseuria accompanied with carbonyl stress induces hydroxyl radical production in renal tubular cells. Oxidative stress plays an important role in the development of diabetic cataract and diabetic microalbuminuria, and is related to the extent of diabetic vascular damage. Level of glycation end-products generated by carbonyl and oxidative stress is an independent predictor of mortality. Initiation of insulin treatment in diabetic patients decreased the oxidative stress and improved the endothelial function. We have formulated guidelines for the treatment of diabetic nephropathy with ACE inhibitors and angiotensin receptor blockers. The antioxidant resveratrol improves carbohydrate metabolism in diabetic patients. Erythropoetin resistance causing early anaemia in diabetic nephropathy was overrided by an antioxidant dose of acetylsalicylic acid

Lipidek és az agyérbetegség – Új lehetőségek az LDL-koleszterin-szint csökkentésére | Lipids and cerebrovascular disease – New therapeutic options in lowering LDL-cholesterol

Absztrakt: A stroke világszerte a harmadik leggyakoribb halálok, a szívinfarktus és a daganatos betegségek után, funkcionális kimenetele pedig valamennyi betegség közül a legrosszabb. A koleszterin, különösen az LDL-C-szint kulcsszerepet játszik az érelmeszesedésben, a plakkok kialakulásában. Az elmúlt években bebizonyosodott, hogy az LDL-C-szint növekedésével arányosan emelkedik a cerebrovascularis betegségek incidenciája és halálozása. A statinterápia egyértelműen csökkenti a stroke-rizikót, de a más módszerekkel elért lipidszintcsökkentő kezelésnek eddig nem volt igazoltan szignifikáns hatása. A magasabb dózisú statinkezelés preventív hatása egyértelmű, ugyanakkor az ilyen dózis alkalmazása fokozott óvatosságot igényel korábbi intracerebralis vérzést elszenvedett betegeknél, és kockáztathatjuk az új keletű diabetes kialakulását is. A közelmúltban közzétett IMPROVE-IT vizsgálat elsőként igazolta, hogy a statinterápia mellé adott nem statin típusú ezetimibbel az LDL-C-szint tovább csökkenthető, ezzel párhuzamosan tovább mérséklődik a cardio- és cerebrovascularis események incidenciája, a mellékhatások számának növekedése nélkül. Ezek az eredmények újra megerősítették a minél nagyobb mértékű LDL-C-szint-csökkentés jelentőségét. A statin-ezetimib kombináció révén a célértékek elérése alacsony és közepes statindózissal is lehetséges, csökkentve ezáltal a magas dózisú statinkezelés mellékhatásainak veszélyét. Orv. Hetil., 2016, 157(52), 2059–2065. | Abstract: Stroke is the third most common cause of death worldwide following myocardial infaction and malignancies, furthermore, its functional outcome is the worst of all conditions. Cholesterol, especially LDL-cholesterol plays a key role in the formation of atherosclerotic plaques. It has been verified recently that escalating incidence and mortality of cerebrovascular diseases are proportional to increased levels of LDL-cholesterol. Statin therapy undeniably reduces the risk of stroke, however other methods for decreasing lipid levels have not been proved significantly effective. Preventive effect of high-dose statin treatment is without doubt, although administration of such high dosage might require special precautions for patients with prior intracerebral hemorrhage and it also risks development of incident diabetes. The recently published IMPROVE-IT study is the first to prove that the addition of ezetimibe as a non-statin type drug, to statin treatment contributes to further reduction of LDL-cholesterol. The combination treatment results in additional decrease in the incidence and mortality of cerebrovascular events, without any expansion in the number or adverse effects. These results confirm the importance of any further reduction of LDL-cholesterol levels. Achieving target values with statin-ezetimibe combination allows administration of low to moderate dose of statin, which decreases risks of adverse effects related to high-dose statin therapy. Orv. Hetil., 2016, 157(52), 2059–2065

Monetary Transmission in Hungary

The Hungarian Monetary Transmission Mechanism research project was expected to fill the gaps in our knowledge. Almost fifteen years after the beginning of the Hungarian transition to a market economy, we felt that the time has come to launch a comprehensive research project with the purpose of obtaining an understanding based on more solid econometric results. Our project was also motivated by the Monetary Transmission Network in the Eurosystem, which gave us the opportunity to compare the Hungarian transmission mechanism to that of the euro area. It took almost three years for the colleagues at the Bank's economics department to explore the most important areas of the transmission mechanism. The research faced several challenges. The data used for estimation are still not completely satisfactory. Moreover, the framework of monetary policy, as well as some structural features of the Hungarian economy have changed during the period under investigation. Moreover, the special characteristics of our economy required a focus somewhat different from what is usual in the literature. Due to the uneven information available regarding the various sectors and markets, it was clear from the beginning that some areas would have to receive only limited coverage, rendering the synthesis of individual results difficult. Despite these shortcomings, the empirical work presented in this volume allows us to gain a better understanding of the Hungarian monetary transmission mechanism and has thus served its stated objective well. The benefits of the project are threefold. First, it confirms our assumption about the primacy of the exchange rate channel in Hungary's small open economy. Second, there are some interesting results that may alter our thinking about how the monetary transmission works. For example, we obtained a refined and – at least compared to earlier beliefs – slightly different picture about the way consumption and investments react to monetary policy actions . Third, it brought to the fore important areas where our knowledge is far from being satisfactory. This recognition calls for further research in order to strengthen the theoretical underpinnings of our monetary policy actions. Such areas are, for example, the labour market and credit markets. We also need a deeper understanding of the factors at work determining the exchange rate. This volume collects the papers written by the project participants. The volume is structured as follows. Studies dealing with the first stages of the transmission mechanism, i.e. how the monetary policy actions are transmitted to financial markets and asset prices, are presented first. They are followed by papers estimating the macroeconomic effects of monetary policy and the behavior of aggregate demand. The last study in the volume tries to assess the potential consequences on the transmission mechanism of joining the eurozone.monetary transmission, Hungary, interest rate pass-through, monetary policy shock, exchange rate smoothing, bank-lending, structural VAR, aggregate demand, investment behavior, euro.