DP625 | Debt Service, Foreign Direct Investment and Transformation to Market: A Simple Model

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In this paper we focus on the macroeconomic framework for the transformation of the formerly socialist economies of Central Europe into capitalist mixed market economies. We construct a simple model to compare the situations in Hungary and Poland on the eve of the transformation before the new governments were elected. This model is used to evaluate the policies designed to lead the two countries along the road to a market economy. The magnitude of the debt service ratio fundamentally influences the chances for stability, while foreign direct investment has a profound influence on real appreciation of the domestic currency.