Structural challenges towards the euro: fiscal policy

Broad theoretical consensus and vast empirical evidence reinforce the view that prudent fiscal policy – also advocated by the fiscal institutions of the eurozone – can support the stable long term growth. After presenting some general principles of the optimal fiscal policy, the paper analyses the questions of fiscal convergence necessary for the successful eurozone entry and membership of Hungary. The paper calculates the consolidation necessary to reach the 2008 deficit target set by the Convergence Program. Taking into account of not only the level of the government debt but also the relatively progressed state of the interest rate convergence, the potential reduction attainable in the interest balance is moderate. The main result of the paper is that the necessary consolidation measures are required to reduce the primary balance by approximately 3 percent. In case of cutting public expenditure it would require approximately 4 percent reduction taking into account the revenue content of those expenditures. The structure of macroeconomic growth is not expected to facilitate fiscal consolidation – as wage and consumption growth, which have major influence on the development of relevant tax-bases, are expected to be moderate – and no improvements in the balance are expected as a result of the EU accession. International experience, especially fiscal consolidations of eurozone member states, however, show that structural – i.e. quality-improving and sustainable – measures and the reform of the institutional framework are essential determinants of successful consolidations. Temporary measures and deficit reductions by creative accounting do not foster macroeconomic stabilization and their eventual reversal is highly probable.Fiscal Consolidation, Optimal Debt Policy, Maastricht Criteria.

"The stolen transition" - Conspiracy theories in post-communist and post-democratic Hungary

Similar to Poland, Hungary also experienced a peaceful transition from communism to democracy and market economy. The Hungarian Round Table Talks were organized in 1989, following the successful Polish model. While the Round Table Talks were similarly crucial in Hungary and in Poland in paving the way for institutional and political changes, and concluded in a very successful manner for the opposition parties, conspiracy theories similar to those seen in Poland (see Soral and Kofta in this issue) are proliferating in Hungary as well. The article argues that the rejection of the "compromises" around the transition is due to the very nature of populism: it likes black-and-white, Manichean logic. This article briefly introduces the process of the Round Table Talks and summarizes the literature's findings on the general social psychological impacts of the transitions. Transitions always provide fertile ground for conspiracy theorizing as they are unexpected even with widespread consequences that fall beyond the control of most members of a society. But in Hungary, these conspiracy theories have been politically exploited in order to fuel discontent towards the democratic institutions - and in this way, they were instrumental in the "second transition", the illiberal de-democratization after 2010

Changing conspiracy beliefs through rationality and ridiculing

Conspiracy theory (CT) beliefs can be harmful. How is it possible to reduce them effectively? Three reduction strategies were tested in an online experiment using general and well-known CT beliefs on a comprehensive randomly assigned Hungarian sample (N = 813): exposing rational counter CT arguments, ridiculing those who hold CT beliefs, and empathizing with the targets of CT beliefs. Several relevant individual differences were measured. Rational and ridiculing arguments were effective in reducing CT, whereas empathizing with the targets of CTs had no effect. Individual differences played no role in CT reduction, but the perceived intelligence and competence of the individual who conveyed the CT belief-reduction information contributed to the success of the CT belief reduction. Rational arguments targeting the link between the object of belief and its characteristics appear to be an effective tool in fighting conspiracy theory beliefs

Monetary Transmission in Hungary

The Hungarian Monetary Transmission Mechanism research project was expected to fill the gaps in our knowledge. Almost fifteen years after the beginning of the Hungarian transition to a market economy, we felt that the time has come to launch a comprehensive research project with the purpose of obtaining an understanding based on more solid econometric results. Our project was also motivated by the Monetary Transmission Network in the Eurosystem, which gave us the opportunity to compare the Hungarian transmission mechanism to that of the euro area. It took almost three years for the colleagues at the Bank's economics department to explore the most important areas of the transmission mechanism. The research faced several challenges. The data used for estimation are still not completely satisfactory. Moreover, the framework of monetary policy, as well as some structural features of the Hungarian economy have changed during the period under investigation. Moreover, the special characteristics of our economy required a focus somewhat different from what is usual in the literature. Due to the uneven information available regarding the various sectors and markets, it was clear from the beginning that some areas would have to receive only limited coverage, rendering the synthesis of individual results difficult. Despite these shortcomings, the empirical work presented in this volume allows us to gain a better understanding of the Hungarian monetary transmission mechanism and has thus served its stated objective well. The benefits of the project are threefold. First, it confirms our assumption about the primacy of the exchange rate channel in Hungary's small open economy. Second, there are some interesting results that may alter our thinking about how the monetary transmission works. For example, we obtained a refined and – at least compared to earlier beliefs – slightly different picture about the way consumption and investments react to monetary policy actions . Third, it brought to the fore important areas where our knowledge is far from being satisfactory. This recognition calls for further research in order to strengthen the theoretical underpinnings of our monetary policy actions. Such areas are, for example, the labour market and credit markets. We also need a deeper understanding of the factors at work determining the exchange rate. This volume collects the papers written by the project participants. The volume is structured as follows. Studies dealing with the first stages of the transmission mechanism, i.e. how the monetary policy actions are transmitted to financial markets and asset prices, are presented first. They are followed by papers estimating the macroeconomic effects of monetary policy and the behavior of aggregate demand. The last study in the volume tries to assess the potential consequences on the transmission mechanism of joining the eurozone.monetary transmission, Hungary, interest rate pass-through, monetary policy shock, exchange rate smoothing, bank-lending, structural VAR, aggregate demand, investment behavior, euro.