Model-based sensitivity analysis of the Hungarian economy to macroeconomic shocks and uncertainties

Bíró, A. and Elek, P. and Vincze, J. (2008) Model-based sensitivity analysis of the Hungarian economy to macroeconomic shocks and uncertainties. Acta Oeconomica, 58 (4). pp. 367-401. ISSN 0001-6373

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Abstract

In this paper we analyse the most important mechanisms of the Hungarian economy with the help of a medium-sized quarterly macroeconomic model developed jointly by the Economic Policy Department of the Ministry of Finance and the Institute of Economics of the Hungarian Academy of Sciences. After introducing the building blocks of the model we investigate, within a scenario analysis, the effects of the main factors behind the macroeconomic and budgetary processes. The sources of uncertainty — defined in a broad sense — are categorised into three groups: changes in the external environment (e.g. an adverse external business cycle shock or an exchange rate shock), uncertainties in the estimated behaviour of economic agents (e.g. in the speed of wage adjustment or in the extent of consumption smoothing), and economic policy decisions (such as the increase of public sector wages). Taking into account the complex relationships between the various areas of the economy, we analyse the short and medium term consequences of such shocks and uncertainties on GDP, its components, the general government deficit and the public debt. We also show that the macroeconomic consequences of the uncertainties are not independent of each other: for instance, the effects of an exchange rate shock are influenced by the speed of wage adjustment.

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