Understanding monetary policy can help to orient business decisions

Understanding monetary policy can help to orient business decisions
Professor Imre Tarafás is one of the most recognized authorities on financial policy in the region, who served as vice-president of the Hungarian National Bank and worked for several international organizations. He is going to be one of the teachers in the course Economic Policy: States, Markets, Institutions.

Professor Tarafás, you will participate in the Economic Policy course. Could you please introduce the topic of your lecture?

My lecture will be about the foundations of monetary policy with focus on the Eurozone. I will start with a brief introduction to monetary policy, the two-tier banking system and the operation of central banks. Then I will present the goals and the (conventional) instruments of modern monetary policy. I will also talk about the major unconventional instrument of monetary policy after the global financial crisis (i.e. quantitative easing) based on the experience of the European Central Bank. Finally, I will introduce the special features of monetary policy conducted in such non-optimum currency areas as the Eurozone.

Why do you think monetary policy can be important for everyday business?

Monetary policy is a powerful instrument which shapes the economic conditions crucially. Through its effect on bank lending, exchange rates and interest rates, monetary policy is one of the most important determinants of aggregate demand in the economy. Concerning the latter, monetary policy also profoundly impacts aggregate output, the level of employment, and inflation. Therefore, the understanding of the mechanisms and the operation of monetary policy can help to orient business expectations and business decisions.

Where does your interest in monetary policy come from?

I spent the first 20 years of my career at the National Bank of Hungary (MNB). In the 1970s and 1980s, Hungary was an interesting laboratory of economic thinking and experimentation as it tried to introduce market elements into a centrally planned economy. Due to political constraints, this experimentation was condemned to moderate success, to say the least. Nevertheless, the confrontation of socialist economic theory with Western practices was an exciting and instructive experience. By the end of the 1980s, at about the start of the transition to market economy, I became vice-president of the MNB. 

You have considerable experience in working at international organizations and banks. Please, introduce them briefly.

I have worked for three international organizations/banks: the International Monetary Fund (IMF), the European Bank for Reconstruction and Development (EBRD), and the Council of Europe Development Bank. As it is well-known, the IMF’s mission is to support countries facing temporary balance of payments difficulties, based on adequate macroeconomic adjustment programs. During the 1980s and the early 1990s, I was a member of the Hungarian delegation which negotiated such programs with the IMF. In 1994, after I left the National Bank of Hungary, the IMF offered me a consultant position. My job was to advise the National Bank of Croatia.
My second international experience relates to the EBRD. The mission of this bank was to assist the transition to market economy of post-socialist countries. I was a member of the board between 2002 and 2005.
Finally, I was a vice-governor of the Council of Europe Development Bank from 2007 to 2012. This bank supports the social development in European countries by providing financing for investments in education, health, infrastructure, and employment in small businesses.