ABSTRACT
This chapter describes the institutional changes that took place including the growing independence of the central bank and briefly outlines the decision-making process. It explains the changes in the system of monetary targeting and instruments reflecting the financial development of the Hungarian economy since 1987. The chapter outlines the importance of the convertibility of the Hungarian Forint. Changes in monetary policy as reflected in monetary policy targeting and central bank behavior were not so clear. Monetary policy was successful in stabilizing the external financial situation. Monetary policy was able to control the domestic component of money creation, but not the foreign component. The Hungarian financial system was transformed completely during the 1990 – 1996 period. The exchange rate policy aimed to cut inflation and to increase efficiency and international competitiveness of the Hungarian economy. In 1992, the Hungarian money market was characterized by large excess liquidity coming from capital inflow and an increased demand for money.
