Central Bank Independence and Monetary Stability in Hungary, 1920s and 1990s

This study compares monetary policy and inflation in Hungary in the first half of the 1920s and the first half of the 1990s. In both periods, economic and financial imbalances placed pressure on the central bank to provide inflationary finance. Eventually, in response to the resulting inflation, central bank independence was significantly strengthened. But while central bank independence helped, in neither case did it suffice to prevent subsequent instability. The central bank inevitably felt pressure to accommodate problems emanating from the banking sector, the balance of payments, the government budget and weakened sectors of the economy. The paper concludes by drawing out the implications for current legislation potentially affecting the independence of Hungary’s central bank.