Thursday, 30 August 2012

A Game of Rates

In our earlier posts about monetary policy, we've written about monetary regimes and their distribution around the world – but we are yet to show how the different mentalities consider different statistical data and have different targets set for them. So we invite the readers to a Game of Rates – by comparing the Hungarian and American central banker simulator, created by the respective central banks, we will show what differences are there between these two countries' monetary mentalities.

United States of America – the Fed Chairman Game


The official US monetary policy basically changes with every appointed chairman – before Alan Greenspan (he was central banker for 20 years), it was monetarist, during him it was non-targeting but expansionary, and nowadays, under Ben Bernanke, leading scholar of the Great Depression, it's quite tight. However, the appointed chairmans generally stick to the so-called Taylor rule, which means that changing of rates responds to shocks in inflation and output.
The Chairman Game only targets unemployment and inflation – as opposed to the Hungarian game below –, and it uses the inflation target of 2%, and an unemployment target of 5%, which are 'mainstream' values for most Western European countries. The game itself is very technical in it's design – the three shown elements are the inflation, unemployment and FED rate graphs, with a newspaper above them providing information (and hints) on your decisions. There are only two random events – one of them being an always-striking oil shock -, but the game is nonetheless VERY suggestive. The newspaper titles provide constant criticism when inflation raises anything above 2% - and likewise, below 2% there is constant warning about the risks of deflation. The game tends to warn about abnormal unemployment levels as well, but only in connection with their effects on reduced economic input – simply put, the game is more technical than it's Hungarian counterpart. 


Hungary - KamatKirály (Base Rate King)


Hungarian monetary policy is quite new – proper conduction of it only started in 1990, after the establishment of the two-tier (central and commercial) banking system and the MNB(Hungarian National Bank) serving as the central bank. The Hungarian monetary regime is officially inflation-targeting, with a goal of maintaining a 3% yearly increase – it is admittedly higher than it's Western European counterparts, with the goal of allowing a 'catch-up' of price levels to Western European levels and stimulating economic growth.
The Kamatkirály (Base Rate King) game is more playful in it's design – it has a professor figure thoroughly explaining the game at the beginning, and the game itself has a wide range of yearly random events, to which you must respond. The game's goal is not only to achieve a 3 percent inflation growth rate, but to also maintain a 4% yearly GDP growth rate – and it has two additional graphs compared to the American one, that of GDP and that of currency exchange rates. The effect of decisions is also different compared to the other game – you can see predictions for all 6 years of your term throughout the game, which are constantly being modified as the game progresses and you change base rates. The effects of the actual rate changes are essentially identical to the effects we discussed in our corresponding post,  making the game is a bit user-friendlier and more understandable. (Unfortunately, the game is only available in Hungarian)

Conclusion


The main difference of the two games – besides their differing levels of interactivity – is the target's they are pursuing; FED pursues inflation and unemployment, while MNB pursues inflation and GDP growth. The target levels in MNB are higher, and you can (and must) assess more factors in the decision-making process, provided by a framework of predictions and external events.

Which one do you like better? Tell us in comments, and happy gaming!

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