Interaction between Monetary and Macroprudential Policies in Practice - A Hungarian Example

As the financial crisis showed, price stability in itself cannot ensure macroeconomic stability and financial stability issues cannot be separated from monetary policy considerations. This paper presents the changes in the relationship between monetary policy and financial stability in Hungary following the outbreak of the financial crisis and its consequences. An important source of the Hungarian economy's vulnerability was the mismatching of maturities and foreign currency positions, arising primarily from foreign currency lending. We describe how a liquidity-based macroprudential instrument (the Foreign Exchange Funding Adequacy Ratio or FFAR) has been used to reduce these risks, thereby strengthening domestic financial resilience. We conclude that the improving maturity structure of foreign funds is expected to mitigate risks arising from the drying up of foreign liquidity and the consequent intensification of exchange rate volatility. As regards the relation between the Hungarian monetary and macroprudential policy, it can be stated that this regulation may provide more room for manoeuvre for monetary policy to focus on its primary objective, namely price stability. At the same time it should be borne in mind that upon the occurrence of certain financial stability risks, falling beyond the MNB's macroprudential competence, monetary policy may still need to react to financial conditions and contribute to the achievement of the financial stability.Full publication: "http://ssrn.com/abstract=2692232" What Do New Forms of Finance Mean for EM Central Banks?