On December 25th, Peter Bihari, president advisor of Hungarian Bank and associate professor of Corvinus University of Budapest, visited PBCSF and made a speech on “The Last 15 Years: Objectives, Constraints, Achievements: Some Monetary Policy Experiences from Central and Eastern Europe”.  Basing on executive experience in the past 15 years （2001-2015）, professor Bihari made a detailed analyzation on the experience and lessons learned from the Mid and Eastern Europe’s inflation targeting.

Professor Bihari thinks, the Mid-European countries, such as Czech, Hungary, Poland and Romania, which are carrying out inflation targeting, are experiencing rapid economic development and relatively stable price environment. Therefore, the inflation targeting has achieved much progress in the countries in economic transition.

He believes Central Bank has solid theories to support the implementation of inflation targeting. In the long run, the monetary policy is to keep the price stable and provide a relatively stable macro-economic environment. Meanwhile, a stable market expectation is the key to the stability of macro-economic, where the monetary policy makes its effect. Inflation targeting just meets the needs of the monetary policy, where smooth volatility can be achieved through stabilizing market expectation, while a growth rate can be achieved by stabilizing the commodity price.

Professor Bihari also points out that two aspects of difficulties were encountered during the execution of inflation targeting: first is how to set the target level of inflation; the second is how to distinguish the target deviation that needs reaction from Central Bank.  Professor Bihari, taking Hungarian Central Bank as an example, explained in detail, how the Bank solved the problem. To the first difficulty, Hungarian Central Bank implemented 3 consecutive policies: Taylor’s Rule under inflation targeting→ to include exchange rate changes in the stated Taylor’s Rule → to include Hungarian domestic economic and capital risk factor in the stated Taylor’s Rule. The rule evolution fully explains that setting the target of inflation is more often based on experience.

To the second difficulty, Hungarian Central Bank considered the benefits and losses in every aspect comprehensively, and reacted against the target deviation caused by aggregate demand shock, but ignored the target deviation caused by aggregate supply deviation. This is because, when the former takes place, production gap and inflation target gap are correlated. Therefore there is the full reason of adjustment. When the later takes place, the production gap and the inflation target are negatively correlated. Therefore, a contradiction is encountered.

In the end, professor Bihari points out that, the largest impact the financial crisis in 2008 has on inflation targeting is that, financial stability should be taken into consideration, but the target of financial stability in the short-run may contradict with inflation targeting, which should be taken into research further.