Case Assignment
Hungary’ s monetary policy: The conflicting objectives
1. Describe the Hungary’s macroeconomic trends before joining the EU! What was the background of adopting the inflation targeting approach in Hungary?
Before joining EU Hungary experienced challenging times in regards to certain macro economical indicators. Although the real GDP growth (4.2 % year on year) showed a constant economic growth, several economic indicators alerted doubts of possible join to the EMU and Euro adaptation in 2008 as panned before.
The Hungarian economy has achieved strong growth since 1993. This good performance has mainly relied on strong foreign investments, increasing exports and rapid integration into European production networks. Therefore Hungarian economy has highly affected by shifting macroeconomic conditions of the world. The world trade growth has slowed and gains in export market share have decreased substantially, so that GDP growth has also weakened.
Due to various internal and external macroeconomic trends main growth corner stones started to crumble. Hungary currency Forint was appreciated constantly by various internal and external economic forces. European countries being the main destination of Hungary exports experienced slow economic development thus affected exports growth As a result exports started to stagnate.
As a result of indistinct government policies the other factor that affected Hungarian economy was expansion in both the private and public demand and consumption that was caused by huge wage hikes for government and public sector employees over the period 2001-2004. That, in turn, led to increase of inflation as prices started to rise. Wage increase was possible due to an increasing government spending and sustained fiscal deficit. Extensive public sector made it very challenging for the government to correct fiscal imbalances by tax increase.
Current economic situation led to introduction of inflation targeting approach...