1. IT Framework in Hungary Pierre L. Siklos WLU & Viessmann Research Centre Waterloo ON CANADA

2. Institutional requirements Instrument independence Effective monetary policy instrument Accountability Disclosure A floating exchange rate Joint responsibility Harmony with fiscal policy Public support Well developed financial system IT Desiderata: part I

3. IT Desiderata: Part II Economic requirements Choice of an appropriate price index Selection of a width and horizon, and symmetry for the inflation target Adequate knowledge of the transmission mechanism of monetary policy Provision of inflation forecasts Adequate measurement and timely arrival of economic information

4. How Gradual? Table 1 Inflation targets Target ratesReference periodDate adopted 7% ±1 percentage pointDecember 2001June 2001 4.5% ±1 percentage pointDecember 2002June 2001 3.5% ±1 percentage pointDecember 2003December 2001 3.5% ±1 percentage pointDecember 2004October 2002 4% ±1 percentage pointDecember 2005October 2003 3.5% ±1 percentage pointDecember 2006November 2004 3% in 2007

5. IT in Hungary: Current State of Play Institutional conditions: are they met? Status (ca. 2002)Status (ca. 2006) Instrument independence? YES YES Effective policy instrument? YES YES Accountability? YESYES Adequate disclosure? YES YES Exchange rate regime? YES ? Joint responsibility for YES ? monetary policy? Fiscal-monetary harmony? YES (in principle)?

6. IT in Hungary: Current State of Play Price 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, symmetry of target bands? ±1% around a specified mid-point of target band Sufficient knowledge about transmission mechanism? Dependent on choice of exchange rate regime Role of inflation forecast? Distribution of risks around some central tendency Measurement, timeliness issues? Largely met

7. Inflation

8. Exchange Rate

9. Maastricht on Their Minds

10. Inflation Forecast Record ForecastTest StatisticSampleNo. of Observations Reuters-Inflation IT 110.04* -0.49 (0.32) 1997-2005100 Consensus Inflation IT 3093.29* -0.27 (0.31) 1996-2005107 Consensus Year Ahead Inflation IT 1353.34* -0.33 (0.31) 1996-2005107 Forecast Combination Inflation IT 349.70* -0.38 (0.35) 1997-2005100 GDP growth Consensus IT 8.02** -1.13 (1.94) 1995-2005106 GDP growth Year Ahead IT 3.64 -0.99 (1.96) 1996-2005106

11. Real Time Problems I

12. Real Time Problems II