Monetary Policy and Risk-Premium Shocks in Hungary: Results from a Large Bayesian VAR
IMF Working Papers, November 1, 2011
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Bibliographic details
- Authors: Adina Popescu, Alina Carare
- Published: November 1, 2011
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781463923983.001
Summary
- Documents the transmission of monetary policy and risk-premium shocks in Hungary using recent advances in the Bayesian estimation of large VAR models.
- The method extracts information from over 100 series, providing a comprehensive description of the impact of monetary policy and risk-premium shocks under the inflation-targeting regime.
- Finds that most channels of transmission are operational in Hungary despite large liability euroization and high foreign ownership of banks and corporations.
- Finds that, due to financial stability concerns, monetary policy responds procyclically to risk-premium shocks.
- Reports that using such a large panel of data improves inflation forecasting performance over smaller models and renders the model suitable for policy purposes.
Methodology
- Applies Bayesian estimation techniques for large Vector Autoregression (VAR) models.
- Utilizes a dataset comprising over 100 series to "open the 'black box' of the transmission mechanism."
Key Findings
- Most channels of monetary transmission are operational in Hungary despite:
- Large liability euroization.
- High foreign ownership of banks and corporations.
- Monetary policy reacts procyclically to risk-premium shocks because of financial stability concerns.
- Larger-panel (large Bayesian VAR) improves inflation forecasting performance relative to smaller models.
Policy Implications and Recommendations
- Large-sample Bayesian VARs can be suitable tools for policy analysis and forecasting, particularly for inflation forecasting.
- Policymakers should account for procyclical monetary policy responses to risk-premium shocks driven by financial stability considerations.
Model Performance and Suitability
- The large Bayesian VAR model:
- Opens the transmission mechanism to detailed analysis.
- Provides improved inflation forecasting performance over smaller models.
- Is presented as suitable for policy purposes.