ABSTRACT
In transition economies where econometric problems are prevalent, more weight may have to be placed on policy advice given by calibrated and more theory-based models. A two-sector open-economy optimising model with sticky prices is constructed and designed to match some characteristics of the Hungarian economy. Domestically-owned and foreign-owned firms differ in their access to capital markets; the former have access only to domestic savings while the latter can borrow from abroad. A calibrated general equilibrium model can be useful in checking the consistency of the intuitions, by providing a yardstick with which to measure the importance of uncertainty about numerical values of key parameters. A monetary tightening does not always lead to a deterioration of the current account balance—often used as the 'headline' measure of external equilibrium. A vast proportion of these enterprises do not have a long track record, and their lenders face asymmetric information and moral hazard problems.
