INTERRELATIONSHIP OF INFLATION, EXCHANGE RATE AND INTEREST RATES IN THE CONTEXT OF HUNGARY'S STRATEGIC POLICY
Authors: Neman Muradli, Sarkhan Bayramov Neman Muradli, Sarkhan Bayramov 
Published: June 2023

With the collapse of the Bretton Woods System, many economic and social structural changes have occurred in the world. With the increase in commercial and financial liberalization mobility, the globalization process has begun to deepen. In this process, the relations between inflation, interest and exchange rates have become very important. It has become important to determine the validity of international parity conditions for the sustainability of the macroeconomic balance in terms of the economies of developed and developing countries. In this study, international parity conditions in Hungary were tested empirically, and evaluations were made in terms of globalization and international monetary system. In order to contribute to the international finance literature, important findings were obtained by making a great responsibility and self-sacrifice from the beginning to the end of the study.
As macroeconomic research develops over the last years, the mechanisms of state influence on the behavior of market economy subjects and their interactions are improved. In the current period, the theoretical models formed on the basis of the synthesis of the main provisions of the neoclassical and Keynesian schools of economic thought, taking into account the interaction of the commodity and money markets, have created an opportunity for the formation of state policy. The main goals of the monetary authorities are to ensure a high and stable level of production and a low and stable level of inflation in the country. Increasing the volume of production leads to an increase in the level of employment in the country, which is one of the important tasks facing the state. The main purpose of the activity of the National Bank of Hungary is to ensure the stability of prices within its powers. The purpose of its activity is to ensure the stability and development of banking and payment systems.
The price levels of products and services are revealed by inflation, one of the pricing mechanisms, while the worth of the national currency on the financial markets is shown by the interest rate and the purchasing and selling prices of foreign currencies by the exchange rates. Additionally demonstrating the economy's balanced production and consumption is the obedient movement of these indicators. Various issues arise for the economy when pricing instruments stray from equilibrium for a while. For the purpose of constructing a stable macroeconomic policy, it is crucial to understand how severely a negative picture in one pricing mechanism would influence the others or how quickly the others will be impacted by a shock in one of the other price mechanisms. The sensitivity ratios across pricing methods may differ as well because each nation's economic structure is unique.
One of the most significant variables in monetary policy procedures that affects economic activity and, consequently, the direction of macroeconomic variables are the interest rates set by central banks. Because central banks must choose the best interest rate strategy while considering the national economy in order to meet macroeconomic goals. From the past to the present, numerous research have been done on the impact of the policy rate set based on the central banks' inflation targeting on the actualization of inflation rates at the intended level. Economic and social stability require price stability, which is a necessary prerequisite. In contrast, when price stability is not achieved, the economy becomes less competitive on the global stage, labor markets become less effective, and most importantly, it leads to a permanent inflation issue by skewing the income distribution, which deepens and prolongs the recession. On the other hand, monetary measures undertaken in a recessionary context lead to anomalous transmission mechanism function and a reduction in monetary policy effectiveness.
In this study, several directions have been used to track how the interest rate, inflation, and exchange rate are formed as well as their mutual relationships. The current condition or change of several variables that are active in various economic sectors has an impact on the three financial variables under consideration. These three factors also have interactions with one another. The internal balance of the economy (as measured by the real and financial sectors) and the external balance have a relative balance connection, to put it more precisely. As a natural result of this, it should not be overlooked that, depending on the structure and traits of the economy, there is or should be a relative balance between all three factors. By changing the alternative costs connection, the disruption of these balances may have a negative impact on the overall economic situation.
In some circumstances, changes in currency rates mark the start of the process, whereas in other circumstances, the inflation rate may. Today, inflation targeting strategy is generally preferred in monetary policy implementations in most countries' economies. Inflation targeting strategy is a monetary policy strategy that can be applied in case of development differences of countries. The central bank uses the monetary policy instruments under its control in line with the determined targets by targeting inflation for the end of the year every year. Interest rates are one of the important policy tools frequently used in the inflation targeting strategy. The purpose of the study is to determine the direction of the causal relationship between inflation and interest, while also taking into consideration Hungary's national policy initiatives.
The length of time that the central banks' set interest rates will remain in force in affecting inflation rates is crucial. According to empirical studies, this time frame can range between twelve and twenty-four months and is dependent on the economies of the various nations. On the other hand, assumptions about the economy's impact from frequent policy changes are another crucial transmission route. Not to be overlooked are the independent application of monetary policies, the strength of accountability, and the power of transparency in influencing expectations.
Keywords: interest rate, exchange rate, inflation, monetary policy, central banks, Hungary