On the occasion of the centenary of the establishment of Hungary’s independent central bank, the Magyar Nemzeti Bank (MNB), our scientific journal, the Financial and Economic Review, is publishing a celebratory thematic issue in tribute to the 100-year history and activities of the MNB, containing studies by the Governor of the MNB and renowned foreign and domestic central bank and monetary policy experts.
In connection with the centenary of the MNB, the published studies and essays express thoughts on the Bank’s mission, its independence and monetary stability, fiscal risks, hyperinflation, fighting inflation, monetary policy, the impact of monetary policy institutional decisions on convergence and reserve requirements. In addition, the feature article published in this issue provides a review on the China-Hungary Green Bond Cooperation.
In his study, György Matolcsy pays tribute to the history of the MNB, which has been working for the past one hundred years to establish and maintain price and financial stability in the Hungarian economy and to support its sustainable growth. He seeks to answer what the Hungarian economy has looked like from the perspective of a central bank over the past hundred years. His main goal is to provide guidance for the challenges of the present through historical lessons. To prepare for this, the independence of the central bank must be preserved and the activities of the branches of economic policy must be coordinated. Over the past nearly 12 years, the MNB has continuously supported the achievement of the above goals.
The article by Barry Eichengreen compares Hungarian monetary policy and inflation in the first half of the 1920s and the first half of the 1990s. In both periods, the central bank was under pressure to provide inflationary finance due to economic and financial imbalances. In response to the resulting inflation, central bank independence was significantly strengthened, which proved useful, but in neither case was it sufficient to prevent a period of subsequent instability. The central bank was under considerable pressure to address problems stemming from the banking sector, the balance of payments, the government budget, and weakened sectors of the economy.
Harold James presents the period of hyperinflation experienced in Central Europe after World War I, with a special focus on the cases of Germany and Poland. Stabilisation was associated with substantial costs, most obviously in terms of recession and unemployment. The countries concerned had sought to use inflation to effect an international as well as an internal redistribution of wealth. Ending the inflation was thus politically costly, and usually involved ceding some aspect of sovereignty or limiting the room for domestic political manoeuvre. For this reason, many inflationary processes did not end, and premature, hasty celebrations were followed by a worsening of the inflationary situation.
Persistent primary deficits are strongly linked to the needs of ageing societies, which are likely to face rapidly changing structural macroeconomic trends, with fiscal balances likely to worsen over time. It is widely acknowledged by forecasters and financial markets that debt-to-GDP ratios are tending to rise over time, but there are signs that the size and persistence of future deficits and debts may be underestimated. Manoj Pradhan and Charles Goodhart argue that a new era is starting, when we will have to face complicated relations between demography, and fiscal and monetary policy.
Major central banks operate in a regime of abundant bank reserves. As a result, they can only raise the money market rate by increasing the rate of remuneration of bank reserves. This, in turn, leads to large transfers of central banks’ profits to commercial banks that will become unsustainable and renders the transmission of monetary policies less effective. Paul De Grauwe and Yuemei Ji propose a two-tier system of reserve requirements that would only remunerate reserves in excess of the minimum required. This would reduce giveaways to banks, allowing central banks to make monetary policies more effective.
The study by Reiner Martin and Piroska Nagy Mohácsi examines the post-pandemic inflation wave through the example of the Visegrad Group countries: the Czech Republic, Hungary, Poland, having independent monetary policies and the euro area member Slovakia. They find that membership of the euro area was not only beneficial in normal economic circumstances, as the advantages of monetary sovereignty in small, open and integrated economies gradually disappeared, but was also particularly useful in times of crisis.
More than thirty years ago, after the collapse of the socialist economic bloc, the countries of Central and Eastern Europe set the strategic goal of catching up with the developed West. An important part of this process was the development of a monetary policy framework. Some countries tried to achieve nominal stability through the early introduction of the euro, while others tried to achieve it through inflation targeting. György Szapáry and Balázs Vonnák show that the success of nominal and real convergence did not depend primarily on the monetary framework that each country used, but on the extent to which it was credible.
The study by István Ábel and Pierre L. Siklos examines the economic stabilising effect of the MNB’s monetary policy implementation. Inflation targeting can bring considerations related to the exchange rate and the business cycle into conflict, and for this reason they are often considered incompatible with the central bank’s price stabilisation mandate. The study uses a simple model of the central bank to assess the interactions between monetary policy variables, including the exchange rate, applied in the flexible inflation targeting framework. The main features of the correlation analysis indicate that the MNB pursued a flexible monetary policy that contributed to the stabilisation of the economy.
The theoretical model by De Grauwe and Ji is complemented by the case study by Csaba Csávás, Pál Péter Kolozsi and Ádám Banai, which examines the modification of the MNB’s reserve requirement system between 2022 and 2024. The authors demonstrate the impact of the steps on banking behaviour and market yields, and how the central bank responded to this in order to maintain the efficient transmission of monetary policy. The Hungarian experience may be relevant, above all, for small, open economies with less developed financial markets using their own currency. The analysis is also novel at an international level, as only a few studies have been published on recent practical experiences with interest rates at which reserves are remunerated.
In a feature article, Bin Hu, Chaoyi Chen and Yueran Zhang review China-Hungary green bond collaboration, emphasising its role in sustainable development. They recommend improving communication to manage risks, opening bidirectional markets, establishing mutual recognition of green bond standards, and enhancing transparency through better information disclosure.
The publication can be viewed on the website of our Journal:
https://hitelintezetiszemle.mnb.hu/en/the-financial-and-economic-review
We wish you a very pleasant reading.
Magyar Nemzeti Bank