Abstract:

Prices all around the globe have embarked on an upward path. Given the ongoing war in Ukraine which is fueling strains in global value chains and the possible flare-up in the energy crisis, inflationary pressures are expected to be persistent. As a consequence, central banks have started increasing the key interest rates. However, high uncertainties are also stemming from the fear of a potential recession. The aim of this paper is to investigate the effects of a permanent increase of the interest rate. Empirical evidence shows that in case of Hungary, Poland and Romania there is a Neo-Fisher effect. Impulse response functions estimated using long run restrictions highlight that a permanent tightening of the monetary policy is expansionary and inflationary, contrary to the standard response to a temporary increase in interest rates. These results highlight the importance of anchoring inflation expectations and show that the ongoing worldwide normalization of monetary policies is not necessarily leading to a recession.