Monetary Policy and Risk-Premium Shocks in Hungary : Results from a Large Bayesian VAR

Author/Editor: Adina Popescu ; Alina Carare
Publication Date: November 01, 2011
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
Summary: We document the transmission of monetary policy and risk-premium shocks in Hungary, by applying recent advances in the Bayesian estimation of large VAR models. The method allows extracting information from over 100 series, opening the "black box" of the transmission mechanism to provide the most comprehensive description to date of the impact of these two shocks on the economy under the inflation-targeting regime. We find novel evidence that most of the channels of transmission are operational in Hungary, in spite of large liability euroization and high foreign ownership of banks and corporations. Due to financial stability concerns, monetary policy responds procyclically to risk-premium shocks. We also find that the use of such a large panel of data improves inflation forecasting performance over smaller models and renders this model suitable for policy purposes.
Series: Working Paper No. 11/259
Subject(s): External shocks | Inflation targeting | Monetary transmission mechanism

Author's Keyword(s): Monetary policy | Risk premium shocks | Transmission mechanism | Large Bayesian VAR.
Publication Date: November 01, 2011
ISBN/ISSN: 9781463923983/1018-5941 Format: Paper
Stock No: WPIEA2011259 Pages: 49
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