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Myths and Maths: Macroeconomic Effects of Fiscal Adjustments in Hungary

By Balázs Párkányi

Abstract

In the short term, the primary effects of a fiscal adjustment most frequently cause a downturn in economic output, although it may also produce stimulating, secondary effects, as well. In relation to this, with the help of an estimated model based on Hungarian data, we analysed how the macroeconomic effects of a fiscal adjustment depend on the type of measures and examined the Hungarian relevance of other effects not definable within the model. We established that in the short term the stimulating effects are not likely to fully compensate for the losses, yet their relevance may increase in the medium and long term. In most cases – depending on the structure of adjustment – the central bank has the option of loosening, but in certain cases, fiscal and monetary policies may be in conflict with each other, due to evolving inflationary pressure.Keynesian, non-Keynesian effects, expansionary fiscal adjustments, monetary policy reactions, model simulations.

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