Transformation Strategy and Economic Performance Hungary and Poland

We use monthly time series data for Poland and Hungary to assess the impact of differences in the pace of implementation of economic reforms. The selected policy variables are a measure of reforms in both the domestic and external sectors of the economy, and they also indicate the initial level of distortions. We use impulse response analysis to measure the effect of changes in the interest rate, the exchange rate, and the share of exports to the European Union on each other and on industrial production. Our results indicate that a faster rate of implementation results in a system that quickly adjusts to a new equilibrium. The exception for Poland is the impact of the interest rate on production, indicating that domestic reforms may not yet be complete. Our results show that, when compared with Hungary, faster reform implementation gives Poland more policy options in one sector with less destabilization in another.