Working Paper: CEPR ID: DP620
Authors: Laszlo Halpern; Istvan P. Székely
Abstract: This paper investigates two behavioural relations for the Hungarian economy, which are vital for formulating future economic policy packages: the export supply and the import demand functions. The specifications of the equations, based on well-known functions of economic theory, take into account the characteristics of the special regulatory environment for enterprises throughout the period (1968-1989). Special attention is paid to export and import subsidies and to import restrictions. As a result of subsidies, the implicit deflators (price indices) derived from national accounts statistics can be misleading and lead to the misspecification of econometric equations. Consequently, previous attempts to estimate price, production and income elasticities were bound to fail or result in biased estimations. In fact, most of the empirical analyses known to the authors reported insignificant parameter estimates and indecisive results.By taking into account the special regulatory environment, in particular subsidies and restrictions, the present analysis identifies stable and well-defined behavioural relations. The equations developed by the present study clearly outperform those which, although derived from the same theoretical framework, do not allow for these special factors. These functions will be incorporated into a complete model of the Hungarian economy, which will allow us to carry out specially designed simulation exercises to investigate the impact of different alternative monetary and exchange rate policies.
Keywords: export supply function; import demand; Hungary
JEL Codes: F14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| export subsidies (H20) | export supply of non-rouble exports (F10) |
| import restrictions (F14) | stable import demand function (J20) |
| modified price index (C43) | reliable estimates of income and price elasticities (D12) |
| correcting for implicit price indices (C43) | stable econometric relationships (C51) |