ABSTRACT
This chapter analyzes Hungary's exchange rate policy. It discusses why an adjustable peg regime was chosen, examines the factors explaining the exchange rate regime's development, and analyzes its macroeconomic effects. The chapter draws some conclusions regarding the use of exchange rate policy in transitional economies. It discusses the changes in macroeconomic policies required for Hungary to successfully stabilize under the "forward-looking" crawling peg regime adopted in March 1995. Hungary had balance of payments difficulties during most of the 1980s stemming from high debt service and weak trade performance. Between 1987 and 1989 Hungary eliminated a substantial number of price controls and import restrictions. Hungary's policymakers recognized that new rounds of import and price liberalization would lead to high inflation and exchange rate depreciation. The use of flexible exchange rates was rejected because Hungary lacked the sophisticated financial markets and institutions needed for efficient functioning of foreign exchange markets.
