Monetary Policy Efficiency and the Taylor Curve: Evidence from Hungary

Dominik Kavrik ()
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Dominik Kavrik: Prague University of Economics and Business

A chapter in Eurasian Business and Economics Perspectives, 2025, pp 363-374 from Springer

Abstract: Abstract This research delves into the validity of the Taylor curve in the Hungarian economy context. The Taylor curve suggests a trade-off between inflation variance and output gap variance, representing monetary policy efficiency. The primary goal is to discern the dynamic relationship between these variances, emphasizing periods before the 2008 financial crisis and post-2020. Hungarian CPI data provided the basis for deriving the inflation rate, while the output gap came from Hungarian industrial production figs. A stochastic volatility model determined the conditional variances of both variables. To understand the changing relationship over time, a Time-Varying Parameter (TVP) model, prevalent in related literature, became the tool of choice. Findings indicate a deviation from the Taylor curve’s expected trade-off in two specific periods: before the 2008 financial crisis and from 2020 onwards. These periods show no evident negative relationship between inflation variance and output gap variance. The proposed trade-off of the Taylor curve doesn’t consistently apply to the Hungarian economy. Periods lacking this trade-off might reflect external shocks or unique economic conditions affecting central bank decisions. Such insights offer valuable perspectives for evaluating monetary policy efficiency in similar transitional economies.

Keywords: Monetary policy; Volatility models; Taylor Curve; Kalman filter (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:spr:eurchp:978-3-031-80256-0_22

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DOI: 10.1007/978-3-031-80256-0_22

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