Abstract
This paper investigates the macroeconomic effect of monetary policy and risk premium shocks in Hungary with focus on the role government securities and foreign exchange markets play in transmitting those disturbances. Financial (monetary policy and risk premium) shocks are identified within a VAR framework by imposing sign restrictions on impulse responses. Hungarian data of the past ten years is used. Financial shocks explain small part of output and price level variance. They are however, the main driving forces behind short-term interest rate and, particularly, exchange rate fluctuations. During the past ten years risk premium shocks have had virtually no effect on output and prices, and only transitionary effect on the interest rate and the exchange rate due to the behaviour of Hungarian monetary policy that successfully neutralised those shocks.
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