Export Supply and Import Demand in Hungary (An Econometric Analysis for 1968-1989)

This paper investigates two behavioural relations for the Hungarian economy, which are vital for formulating future economic policy packages: the export supply and the import demand functions. The specifications of the equations, based on well-known functions of economic theory, take into account the characteristics of the special regulatory environment for enterprises throughout the period (1968-1989). Special attention is paid to export and import subsidies and to import restrictions. As a result of subsidies, the implicit deflators (price indices) derived from national accounts statistics can be misleading and lead to the misspecification of econometric equations. Consequently, previous attempts to estimate price, production and income elasticities were bound to fail or result in biased estimations. In fact, most of the empirical analyses known to the authors reported insignificant parameter estimates and indecisive results.By taking into account the special regulatory environment, in particular subsidies and restrictions, the present analysis identifies stable and well-defined behavioural relations. The equations developed by the present study clearly outperform those which, although derived from the same theoretical framework, do not allow for these special factors. These functions will be incorporated into a complete model of the Hungarian economy, which will allow us to carry out specially designed simulation exercises to investigate the impact of different alternative monetary and exchange rate policies.