Hungary's responsiveness to foreign trade has increased substantially during the last two decades, and economic transformation will further change economic agents' behavioural characteristics. Managing the foreign debt will undoubtedly remain at the top of the policy-making agenda for quite some time, so any monetary or exchange rate policies and export subsidy packages must be designed to accommodate balance-of- payments targets. In Discussion Paper No. 620, Research Affiliate István Székely and László Halpern note that previous empirical studies of Hungary's foreign trade balance have produced neither stable econometric relationships nor reliable estimates of price, income and output elasticities; economic policies adopted as a result were bound to overshoot (or undershoot) and hence exacerbate volatility.

Halpern and Székely develop a new model that takes account of some of the Hungarian economy's special characteristics during 1968-89. In particular, by identifying the impacts on non-rouble exports of subsidies to both rouble and non-rouble exports, they derive more realistic (and stable) estimates of export price elasticities. Many other factors, such as credit preferences and preferential treatment for exporting firms in wage regulations and import licensing, may have had important and sizeable impacts on export supply behaviour, but these are almost impossible to quantify and would indicate misspecification of the new equations. The authors also modify the import price index to allow for subsidies and import restrictions, which played a major role during the 1980s. These helped to establish a stable import demand function and secure more reliable parameter estimates.

Halpern and Székely conclude that their method of correcting for specific features of export and import policies allows meaningful and stable estimates of trade equations to be obtained, which will greatly aid the design of more coherent policy packages. But significant price elasticities alone cannot justify or find against devaluation (or appreciation). It is always relative prices that matter; and these ratios between domestic and export (or import) prices can improve or deteriorate depending on movements in the exchange rate or other factors that influence domestic prices, including fiscal and monetary policies among other factors.

Export Supply and Import Demand in Hungary
(An Econometric Analysis for 1968-1989)
László Halpern and István P Székely

Discussion Paper No. 620, February 1992 (IT)