Test of an inverted J-curve hypothesis between the expected real exchange rate and real output: the case of Hungary

Applying a reduced form equation derived from a simultaneous system and the interactive dummy variable technique, this paper finds that expected real depreciation raises real output for Hungary in early years whereas expected real appreciation increases real output in later years. Hence, there is evidence of an inverted J-curve relationship between the expected real exchange rate and real output. In addition, a lower ratio of government consumption spending to GDP, a higher real financial stock price, and/or a lower expected inflation rate would increase real GDP for Hungary.