Saving and portfolio allocation decisions are key factors in Hungary's transformation to a market economy. Until bond finance was reintroduced in 1983, the structure of Hungary's household financial assets was extremely simple: households were serviced solely by the National Saving Bank and the Saving Cooperatives; the central authorities set both the terms of completely standardized financial products and the nominal interest rates on assets and liabilities. The latter remained practically unchanged until 1986, but fluctuations in consumer price changes made real interest rates rather volatile, which had a strong impact on household saving and portfolio allocation.

In Discussion Paper No. 619, Research Affiliates István bel and István Székely argue that these real interest rate fluctuations were central to households' patterns of portfolio allocation during 1970-90. Other factors may also play major roles in Hungary's economic transformation: inflation, price and income uncertainties and changes in housing finances were already fairly volatile during the 1980s and may be even more so in the 1990s.

bel and Székely describe the impact of financial innovation during the 1980s on household saving and portfolio allocation. They note that the financial instruments that became popular were all perfectly safe, highly liquid and artificially high-yield assets; households currently seem unwilling to buy long-term illiquid financial assets. They also consider real assets, in particular by estimating the value of the privately-owned housing stock and relating it to the value of other assets. The owner occupation rate was high and increasing throughout the period, and this process was strongly influenced by the changes in the level and nature of state housing provision. Simple evidence on yearly accumulation of gross wealth does not support the common view that households gradually increased the shares of real assets in their portfolios to accommodate increased inflation, but it can be substantiated by also taking account of inflationary losses on stocks of financial assets and net wealth.

bel and Székely conclude that the transformation and restructuring of the Hungarian economy will require substantial financial resources. Foreign direct investment will be an important part of this total, but it is unlikely to suffice; so domestic private saving and portfolio allocation decisions will be important components of economic policy.

Household Portfolios in Hungary, 1970-1990
István bel and István P Székely

Discussion Paper No. 619, January 1992 (AM)