This Country Focus studies the impact of changes in government expenditure in Hungary over the period 1997Q1 to 2005Q4 using a structural vector-autoregressive model. The results suggest that discretionary shifts in government expenditure have a mixed impact on the economy. In particular, while households are found to respond positively to expansionary government spending leading to an increase in their income, our findings point to a negative reaction on the part of the corporate sector. Overall, increasing government expenditure is found to lead to a contraction in GDP. Private employment is also found to fall back.
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