Financial liberalisation – The dilemmas of national adaptation

Abstract

This study explores two of the main issues of global financial processes: the economic essence of the benefits gained from the increased liberalisation of international capital flow, and the issue of “adequate” exchange rate systems as closely aligned with the increased international capital flow as possible. Conclusions are in part theoretical and in part practical. The study confirms the state-ment that the liberalisation of capital flow and the exchange rate policy to be realised continue to be highly problematic to this day. There is no uniform and theoretically well-grounded position that could properly describe the liberalization of capital transactions or the adequate exchange system to be implemented from all possible angles. The so-called ‘impossible trinity’, the peculiar difficulty of the simultaneous following of foreign and domestic goals is increasingly present in small open economies such as the Hungarian econ-omy for example. Due to the high degree of international financial integration, domestic and foreign loan demand and upturn cannot be regulated by such traditional tools as interest and fiscal economy stimulating measures, that is, by such simultaneous measures as point in the same direction and do not act against one another. This is increasingly reflected in Hungary by the difficulties encountered in the country’s interest policy and HUF and foreign currency lending. At the same time, current economic policy cannot shy away from the obligation to find a balance between domestic and external goals that can be maintained in a changing global financial environ-ment. However, there is no “royal road” for economic policy. This statement is true for the role played by the central bank as well, which is aimed at the management of banking system-level risks caused by the inflated Hungarian foreign currency debt.