The Hungarian exchange rate and inflation over the transition

The relationship from inflation and the real exchange rate to the rate of depreciation of the exchange rate for Hungary is investigated over 1991m6-2002m2. Evidence is found that prior to the adoption of the pre-announced crawl in 1995 depreciation responded to inflation. After the adoption of the crawl inflation is dominated by a trend that indicates the rate of depreciation to be diminishing over time. This trend is interpreted as being deterministic, as a consequence of the gradual reductions in the rate of official devaluations. In both periods depreciation was found to respond to the real exchange rate in ways that limited real appreciations of the currency.