Tuesday, February 26, 2008


Earlier, I posted an article about Hungary's low-growth epidemics emerged from a misguided economic policy. Hungary, known for a staggering public finance, recently abandoned currency trading by letting forint float freely (link)

Hungary's macroeconomic attributes are certainly not an admiration. Excessive public spending and prolonged government borrowing to squeeze budget deficit has let the interest rate unsurprisingly high and discounted investment confidence, letting growth prospects to new record lows. Abandoning the regime of targeting exchange rate and the inflation rate has its wise attributes. It makes no sense to manipulate with the exchange rate that could foster currency depreciation at the expense of higher inflation.

Hungary's prospects to join the ERM-2 trading mechanism were railed out after the combination of high government spending and excessive borrowing left one of the major economies in Central Europe out of the euro-zone. The decision to let the forint float freely is not enough. On one hand, Hungary should enhence pro-growth economic and tax policy and its central bank should launch a clear commitment to prudent monetary policy that would keep the inflation frontier at a low level and prevent extraordinary market intervention of the Hungary's central bank.

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