The Impact of EU Cohesion Funds on Macroeconomic Developments in the Visegrád Countries After the 2008–2009 Financial Crisis

Abstract

This chapter investigates how cohesion funds were spent and how these funds impacted economic developments in the Visegrád countries (Czechia, Hungary, Poland, Slovakia) on short, medium and long terms. Czechia has been the most developed country in the region, Poland and Slovakia were dynamically converging to the European average while the latter also joined the euro-zone and Hungary has significantly improved its external and internal imbalances.

The analysis shows that the sizable spending from cohesion funds had a major impact on growth, investment, external and fiscal conditions. Cohesion funds generally have their primary economic impact throughout investments (both public and private). Funds aim to increase the country’s growth potential in the long run. Spending on competitiveness (R&D, education, health, etc.) might have smaller impact on short term but can have significant long-term effect because it provides more attractive conditions for private investments. While on the other hand, financing private projects can generate significant impact on the short term but the additional impact dissipates quickly. The increased growth potential can generate additional tax revenues in the long term.

Appendix A: Summary of Model

Households

$$ {C}_t^{OLG}= MP{C}_t\left( In{c}_t+\left(1+{r}_{t-1}\right){B}_{t-1}+\left(1+{r}_{t-1}^{\ast}\right)\frac{REE{R}_t}{REE{R}_{t-1}}{B}_{t-1}^{\ast}\right) $$

$$ In{c}_t=\left(1-{\tau}_t^L\right){w}_t\psi {S}_t+ Profi{t}_t-{T}_t+\left(1-\omega \right){E}_t\frac{In{c}_{t+1}}{1+{r}_t}\frac{1}{1+{g}_{t+1}^{N.}} $$

Capital producers

$$ {K}_t= In{v}_t+\left(1-\delta \right){K}_{t-1} $$

$$ \frac{Q_t}{p_t^{Inv}}=1+S\left(\frac{Inv_t}{Inv_{t-1}}\right)+{S}^{\prime}\left(\frac{Inv_t}{Inv_{t-1}}\right)\frac{Inv_t}{Inv_{t-1}}-\frac{1-\omega }{1+{r}_t}{E}_t\frac{p_{t+1}^{Inv}}{p_t^{Inv}}{S}^{\prime}\left(\frac{Inv_{t+1}}{Inv_t}\right){\left(\frac{Inv_{t+1}}{Inv_t}\right)}^2 $$

$$ re{t}_{t+1}=\frac{E_t\left(1-{\tau}_{t+1}^K\right){r}_{t+1}^K+{\tau}_{t+1}^K\delta {Q}_{t+1}+{Q}_{t+1}\left(1-\delta \right)}{Q_t} $$

Banks

$$ {N}_t=\theta \left[\;\left( re{t}_t-\left(1+{r}_{t-1}\right)\left(1+{\xi}_{t-1}^{EP}\right)\right)\frac{\eta_{t-1}}{\lambda -{v}_{t-1}}+\left(1+{r}_{t-1}\right)\left(1+{\xi}_{t-1}^{EP}\right)\right]{N}_{t-1}+{\omega}^{Bank}{Q}_t{K}_{t-1} $$

$$ {Q}_t{K}_t=\frac{1}{1-{\psi}_t}\frac{\eta_t}{\lambda -{v}_t}{N}_t $$

Intermediate firms

$$ \frac{\varphi }{\varphi -1}{mc}_t=1+\frac{1}{\varphi -1}R\left(\frac{1+{\hat{\pi}}_t}{{\left(1+{\hat{\pi}}_{t-1}\right)}^{\gamma }}\right)+\frac{1}{\varphi -1}{R}^{\prime}\left(\frac{1+{\hat{\pi}}_t}{{\left(1+{\hat{\pi}}_{t-1}\right)}^{\gamma }}\right)\frac{1+{\hat{\pi}}_t}{{\left(1+{\hat{\pi}}_{t-1}\right)}^{\gamma }}+\left(1-\omega \right){E}_t\frac{1}{\varphi -1}\frac{Y_{t+1}}{Y_t}\frac{R^{\prime}\left(\frac{1+{\hat{\pi}}_{t+1}}{{\left(1+{\hat{\pi}}_t\right)}^{\gamma }}\right)\left(\frac{1+{\hat{\pi}}_{t+1}}{{\left(1+{\hat{\pi}}_t\right)}^{\gamma }}\right)}{1+{r}_t} $$

Retailer firms j ∈ {C, INv, Gov, X}:

$$ m{c}_t^j={\left[\mu +\left(1-\mu \right){\left( REE{R}_t{\tilde{p}}_t^{M,j}\right)}^{1-\kappa}\right]}^{\frac{1}{1-\kappa }} $$

$$ {Y}_t^j=\mu {\left(\frac{p_t^Y}{m{c}_t^j}\right)}^{-\kappa }{Z}_t^j $$

$$ \frac{\varphi_j}{\varphi_j-1}\frac{mc_t^j}{p_t^j}=1+\frac{1}{\varphi_j-1}R\left(1+{\hat{\pi}}_t^j\right)+\frac{1}{\varphi_j-1}{R}^{\prime}\left(1+{\hat{\pi}}_t^j\right)\frac{1+{\hat{\pi}}_t^j}{{\left(1+{\hat{\pi}}_{t-1}^j\right)}^{\vartheta }}-{E}_t\frac{1}{\varphi_j-1}\frac{1-\omega }{1+{r}_t}\frac{p_{t+1}^j}{p_t^j}\frac{Z_{t+1}^j}{Z_t^j}{R}^{\prime}\left(1+{\hat{\pi}}_{t+1}^j\right)\frac{1+{\hat{\pi}}_{t+1}^j}{{\left(1+{\hat{\pi}}_t^j\right)}^{\vartheta }} $$

$$ Profi{t}_t^j={p}_t^j{Z}_t^j-{Y}_t^j- REE{R}_t{M}_t^j\left(1+G\left(\cdotp \right)\right)-{p}_t^j{Z}_t^jR\left(\cdotp \right) $$

Government

$$ \mathit{\operatorname{Re}}{v}_t={\tau}_t^C{C}_t+\left({\tau}_t^L+{\tau}_t^S\right){w}_t{L}_t\left({\tau}_t^K{r}_t^K-{\tau}_t^K\delta {Q}_t\right){K}_{t-1}+{T}_t+ EU{F}_t $$

$$ \mathrm{E}x{p}_t=T{R}_t+{p}_t^{Gov} Go{v}_t+{p}_t^{Gov} In{v}_t^{Gov}+{\psi}_t{Q}_t{K}_t $$

Monetary policy

$$ 1+{i}_t={\left(1+{i}_{t-1}\right)}^{\rho_i}{\left[\left(1+i\right){\left(\frac{1+{\pi}_{t+1}^C}{1+{\pi}_{t+1}^{C, tar}}\right)}^{\phi_{\pi }}\right]}^{1-{\rho}_i}{e}^{\epsilon_t^i} $$

Foreign trade

$$ {X}_t={\left(\frac{p_t^X}{REE{R}_t}\right)}^{-\theta } GD{P}_t^{\ast } $$

$$ T{B}_t={p}_t^X{X}_t- REE{R}_t{M}_t $$

$$ T{B}_t={B}_t^{\ast }-\left(1+{r}_{t-1}^{\ast}\right)\frac{REE{R}_t}{REE{R}_{t-1}}{B}_{t-1}^{\ast }- EU{F}_t $$

Equilibrium conditions

$$ {Y}_t={Y}_t^C+{Y}_t^{Inv}+{Y}_t^G+{Y}_t^X+{Y}_tR\left(\cdotp \right)+{p}_t^{Inv} In{v}_tS\left(\cdotp \right)+w{c}_t{L}_tR\left(\cdotp \right) $$

$$ {M}_t={M}_t^C\left(1+G\left(\cdotp \right)\right)+{M}_t^{Inv}\left(1+G\left(\cdotp \right)\right)+{M}_t^G\left(1+G\left(\cdotp \right)\right)+{M}_t^X\left(1+G\left(\cdotp \right)\right) $$

$$ GD{P}_t={p}_t^C{C}_t+{p}_t^{Inv} In{v}_t+{p}_t^G{G}_t+{p}_t^X{X}_t- REE{R}_t{M}_t $$

Parameters

• B^∗—Foreign bond

• K_t—Capital

• MPC_t—Marginal propensity to consume

• REER_t—Real effective exchange rate

• W—Nominal wage

• i_t—Nominal interest rate

• r^∗—Foreign interest rate

• h—Technical parameter for households’ behaviour (habit parameter)

• p—Nominal prices

• B—Domestic bond

• C—Consumption

• Debt—Government debt

• E—Expectations

• EUF_t—EU funds

• Exp—Expenditures of the government

• G—Adjustment function

• GB—Balance for the government budget

• Inc—Total income for households

• Inv—Investments

• L—Labour force

• M—Import

• N—Net value

• Profit—Profit for final producer

• Q—Tobin’s Q

• R—Rotemberg’s cost function

• Rev—Revenues of the government

• T—Taxes

• TB—Trade Balance

• TC—Total cost

• TR—Transfers

• X—Export

• Y—Total output

• g—Growth rate

• mc_t—Marginal cost

• r—Interest rate

• ret—Return

• v—Technical parameter for financial sector

• α—Technical parameter for production

• β—Technical parameter for households’ behaviour

• δ—Amortization rate

• η—Technical parameter for financial sector

• θ—Technical parameter for financial sector

• λ—Technical parameter for financial sector

• μ—Import share in production (technical parameter)

• ξ—Yield spread between risk-free (government bond) and risky (corporate bond)

• π—Inflation

• τ—Taxation rate

• φ—Technical parameter for pricing

• ψ—Technical parameter for households

• ω—Technical parameter for household

• ϕ—Technical parameter for monetary policy