Monetary and Fiscal policy

1) In 2004, both Hungary and Poland, the two fastest growing economies in Eastern Europe were ready to join the EU. Since the 1980s, both the countries had experienced unfavourable political and economic conditions. Both had a history of hyperinflation, high levels of foreign debt and poor institutional and economic framework. 

2) While Poland was largely successful in curbing inflation (1993: 35.3%, 2002:1.9%) with an efficient interest rate policy. Hungary was struggling with high interest rates ( 2003: 12.5% p.a). 

3) In Hungary, period 1990-94 had two important weakness. The first was the loose fiscal policy leading to huge fiscal deficits and high foreign debt. The second was ineffective monetary policy. The liberalisation of forex operations and the continuous appreciation of the currency resulted in significant capital inflows, which narrowed the scope of monetary policy in controlling the money supply. 

4) In the late 1980s, Poland's economy initiated its transition process under less favourable conditions when compared to Hungary. 

5) Fiscal policy is necessarily expansionary in a developing economy. Governments always want to increase their expenditures beyond their resources in the hope that in the subsequent stage, output will catch up with increased expenditures. But the question is whether  monetary policy can achieve anything when the fiscal policy is expansionary?