Fiscal Policy, Crisis Response, and Household Savings in Hungary, Slovenia, and the Czech Republic: A Markov Switching VAR and Machine Learning Approach
The COVID-19 pandemic significantly disrupted household consumption, savings, and income across Europe, with Hungary, Slovenia, and the Czech Republic among the most affected. This study investigates the effectiveness of fiscal policies in mitigating these impacts, focusing on key government interventions such as spending, subsidies, revenue, and debt. Utilizing a Markov Switching Vector Auto regression (MS-VAR) model, the analysis covers data from 2000 to 2023 and distinguishes three economic regimes: the initial shock, the peak crisis, and the recovery phase. To enhance forecasting accuracy and capture complex nonlinear relationships between fiscal variables and household behaviour, the study also employs the Extreme Gradient Boosting (XGBoost) machine learning algorithm.
The results show that the COVID-19 shock caused a sharp decline in household consumption and income in all three countries, with Slovenia experiencing the most severe immediate impact. Hungary demonstrated the strongest recovery, supported by effective fiscal measures such as subsidies and increased government spending, which significantly improved household outcomes. The Czech Republic followed a more gradual recovery path, with notable improvements in forward-looking consumption behaviour (IMPC). The XGBoost model provides out-of-sample forecasts that reinforce these findings, showing Hungary with the most favourable projected recovery path.
Overall, the study highlights the importance of timely and targeted fiscal interventions in managing the effects of economic crises. The findings suggest that governments should prioritize flexible, data-driven fiscal policies to protect household financial stability during downturns and promote sustainable recovery.
Copyright© 2025 The Author(s). This article is distributed under the terms of the license CC-BY 4.0., which permits any further distribution in any medium, provided the original work is properly cited.
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