In my thesis, I explored the impact of monetary policy—specifically interest rate increases—on the Hungarian forint's exchange rate during a period of heightened economic volatility in Europe, which has been affected by both demand- and supply-side inflation. Focusing on Hungary, I examined how policymakers responded to rising inflation by raising interest rates, a traditional measure to curb inflation that may be less effective in the current supply-side inflation context.
My research hypothesis was that recent interest rate hikes had minimal influence on the forint’s value against a portfolio of currencies significant to Hungary's foreign trade. This suggested that monetary policy might not have a substantial impact on exchange rates in the short term, potentially indicating the need for alternative or supplementary policy measures. By studying this unique case, I aimed to provide insights into the potential limitations of interest rate adjustments under supply-side inflation and to guide future economic policy for Hungary and other European nations facing similar economic challenges.
The structure of my paper included an introduction that framed the research and objectives, followed by a literature review discussing the relationship between interest rates and exchange rates both globally and within Hungary. The methodology section outlined the event study approach, my data sources, and sample selection. In the empirical analysis, I presented statistical findings on the forint’s abnormal returns around interest rate changes. My conclusion summarized key takeaways and suggested directions for future research.
This study was motivated by both academic and personal goals. I undertook this research to improve my skills as a quantitative researcher and deepen my understanding of financial markets. Supported by the New National Excellence Program (ÚNKP), I also aimed to emphasize the connection between science and art by designing clear, visually appealing figures and standardizing the layout for readability, even for those unfamiliar with event studies.
This study examines the impact of Hungarian National Bank (MNB) base interest rate increases on the Hungarian forint (HUF) exchange rate during 2021 and 2022. An event study methodology is employed, with a carefully chosen portfolio of foreign currencies representing the HUF exchange rate. Abnormal returns are calculated and analysed using various models and statistical tests, including the Student’s t-test and the Wilcoxon signed-rank test. The findings suggest that interest rate increases have a statistically significant, but potentially slight, negative effect on the HUF exchange rate. While the constant models and the Market-adjusted model with average return focus are not conclusive, the Market Model with regression estimation reveals a significant difference in abnormal returns before and after interest rate hikes. This implies a measurable impact of MNB’s monetary policy on the foreign exchange market. The research contributes to the understanding of the Hungarian foreign exchange market dynamics and the effectiveness of interest rate adjustments. It highlights the importance of considering exchange rate stability when formulating economic strategies and provides valuable insights for international trade, currency investors, and policymakers. The methodological advancements and empirical evidence presented offer valuable resources for both academic research and policymaking in international finance and monetary economics.