Alternate adjustments to external shocks in Hungary

Abstract

A multisector computable general equilibrium model is used to evaluate Hungary's response to the external price shocks in the 1970s. The model incorporates characteristics of Hungary's reformed socialist economy. The results show that although the deterioration in terms of trade was important, the policies of insulation of the economy and increases in investment had a much larger detrimental impact on the trade balance. The existence of planned CMEA trade reduced the effects of the price shocks on the trade deficit. Export promotion by means of higher export subsidies would not have been effective to reduce the trade deficit in Hungary.