1. Choosing Exchange Regimes: The Parallels and Contradictions of the Hungarian and Brazilian Experiences Pierre L. Siklos, WLU & Viessmann Centre István Ábel, IMF

2. Definitions HUNGARY Jan 1991-95, soft peg with periodic devaluations (22) Mar 1995-Sept 2001 pre-announced crawling peg 4 May 2001. Float within ERM II type bands. Adoption of inflation targeting, 12 June 2001 # CRISES: 0?* [1972- 2003] BRAZIL 1994 Real plan: asymmetric band (upper limit=parity but no lower limit) March 1995: wide band introduced with inner band defining intervention limits  crawling peg of 0.6% dev per month Jan 1999: failed controlled devaluation followed by a float March-June 1999: inflation targeting with float # CRISES: 4 [1972- 2003]

3. Hungarian Exchange Rate

4. Changing Inflation Persistence in HUNGARY

5. Persistence in forecasts and the ER

6. Causes of Regime Changes and Factors Leading to the Changes HUNGARY Historically weak political and economic institutions An historical preference for “gradualism” An aversion to permitting full domestic adjustment to shocks due to transitional issues Eventually a strong political will for EU/EMU membership (not wildly popular) scheduled for 2008. BRAZIL Ditto Federalist structure+threat of military dictatorship delayed reforms Ditto Development of a political consensus toward reform and liberalization of markets (early stages, credibility not yet established)

7. What Kind of Inflation Targeting Regime? HUNGARY Inflation objectives: 6-8% July 2001; 3.5-5.5% by 2002; 2% long term goal No contingencies but they are contemplated Targeting horizon in place Adopted 12/June/2001 Inflation report in place (pre- dates adoption of IT) Target is set jointly with government Published inflation forecasts (consensus type) FLEXIBLE IT BRAZIL Inflation objectives: 6-10% in 1999; 4-8% in 2000, 2001; 1.5- 5.5% in 2002; 2-6% in 2003; 1.75%-5.75% in 2004 Targets are “adjusted”: 8.5 in 2003, 5.5 in 2004; based on contingencies 1 st set of targets for 3 yrs, 2 yrs thereafter Adopted 21/6/1999 Inflation report introduced 09/1999 Joint based in proposal by Finance Minister Published inflation forecasts (Copom + consensus) SINGAPOREAN STYLE IT

8. Taylor rule for Hungary (Fig 3b updated)

9. The Brazilian Approach to Contingencies Item20032004 “Notional”Target 4.03.75 Regulated price shocks 1.71.1 Inertia ignored2.80.6 Adjusted Target 8.55.5

10. Government – Central Bank Relations: What The Statutes Say? HUNGARY Organic law Statutorily autonomous but effective autonomy low Persistent govt-CB conflicts Monetary Council sets policy (meets 2/m, 7 to 9 members; created before IT) Pres + 3 VPs plus other members appt by Rep Pres (subject to hearing) CB Act revised fairly frequently (2001 is last revision due to EU membership) No requirement to report to Govt in the event IT fails BRAZIL Organic law No statutory autonomy but effective autonomy has risen since IT introduced Ditto MPC (Copom) created before IT meets 1/m Governor + 7 Dep Govs CB revision planned to give autonomy Open letter required to Fin Minister (21/1/03; 16/1/02)