Working Paper: CEPR ID: DP625
Authors: Istvan Abel; John P Bonin
Abstract: In this paper we focus on the macroeconomic framework for the transformation of the formerly socialist economies of Central Europe into capitalist mixed market economies. We construct a simple model to compare the situations in Hungary and Poland on the eve of the transformation before the new governments were elected. This model is used to evaluate the policies designed to lead the two countries along the road to a market economy. The magnitude of the debt service ratio fundamentally influences the chances for stability, while foreign direct investment has a profound influence on real appreciation of the domestic currency.
Keywords: debt service ratio; foreign direct investment; macro model; East European economic transformation
JEL Codes: E63; F41; P52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Debt service ratio (F34) | Stability (C62) |
| Foreign Direct Investment (F21) | Real appreciation of domestic currency (F31) |
| Fiscal policy in Poland (shock therapy) (E65) | Decrease in nominal GDP (E20) |
| Fiscal policy in Poland (shock therapy) (E65) | Appreciation of the zloty (F31) |
| Increase in fiscal deficit in Hungary (H69) | Disequilibrium of the economy (D59) |
| Disequilibrium of the economy (D59) | Depreciation of the forint (F31) |