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Abstract

We investigate the relationship between economic growth and real exchange rate (RER) misalignments within the European Union (EU) during the period of 1995–2016. In addition to the relative price level of GDP, we quantify an alternative indicator for the RER: the internal relative price of services to goods. We interpret RER misalignments as deviations from the levels consistent with the levels of economic development among the EU countries. Using pooled OLS and dynamic panel techniques, we find that within the EU over- (under-) valuations are associated with lower (higher) growth. This is mainly due to developments in the countries operating under the fixed exchange rate regimes. Our results indicate that the level of development does not influence the strength of the growth-misalignment relationship within the EU. Regarding the price level of GDP, we find that the positive relationship between undervaluation and growth diminishes with the degree of undervaluation. We find that overvaluation has a statistically significant negative effect on export market shares and private investments, indicating that both the competitiveness and the investment channels play a role in the relationship between growth and RER misalignments. As an extension, we show that the effects of “wage misalignments” from levels consistent with productivity are also negatively related to economic growth. The policy implications of the analysis point to the importance of a growth strategy avoiding overvaluation on the one hand, and to the futility of aiming at excessive undervaluation, on the other.

Open access
Acta Oeconomica
Authors:
Judit Krekó
,
Hanna Erős
,
Bori Greskovics
,
Áron Hajnal
, and
Ágota Scharle

Abstract

The study examines the income redistribution effects of the Hungarian flat-tax and the recently introduced family allowance scheme. They were done on the basis of people's individual data for 2007, 2011 and 2020, which yields more accurate estimates than the previous studies based on aggregate or survey data. Between 2011 and 2013, progressive taxation was abolished, and a flat income tax was introduced, along with a substantial widening of pre-existing family tax allowances. We find that the tax reform has favoured high-income earners and taxpayers with children, while the main losers were low-income and/or childless workers. While the share of family tax allowances is somewhat lower for the high-income deciles, this effect is in practice negligible, therefore the income tax system can still be considered flat. The family tax allowance scheme favours wealthy families with many children over low-income families with fewer or no children. The biggest winners of the scheme are the taxpayers in the top income decile with three or more children: these 22,000 taxpayers (that is, 2% of all recipients) receive 10% of the total amount of the family tax allowance, and almost a third of the credit allocated to families with three or more children.

Open access