ABSTRACT
This chapter considers the use of sterilization by the National Bank of Hungary. It focuses on Hungary for a number of reasons. First, Hungary has experienced substantial capital flows for a much longer period than have any of the other transitioning economies. Second, the available time series are not only relatively longer for Hungary but are available for a much wider spectrum of macroeconomic variables than in other transitioning economies. The chapter provides an overview of exchange rate developments in Hungary and briefly contrasts these with the Polish and Czech approaches. It describes the sterilization option in transition economies and contrasts this with the experience in the Southern Cone. The chapter outlines the specification and estimation of a reaction function for the National Bank of Hungary. It presents estimates of reaction functions for the National Bank of Hungary and provides a quantitative assessment of the extent to which inflows of foreign capital were allowed to affect the monetary base.
