Fiscal and Monetary Dominance in the Visegrad Group: Evidence from Regime Heterogeneity

Although coordinating fiscal and monetary policy is essential for stabilizing small and globally exposed economies, researchers frequently oversimplify by treating the Visegrad Group (V4) as a uniform entity. This study investigates whether the Czech Republic, Hungary, Poland, and Slovakia are converging toward a unified macroeconomic standard or diverging due to institutional heterogeneity. Employing a hybrid framework combining Markov Regime-Switching Vector Autoregressive (MS-VAR) and single-regime robust OLS models alongside dynamic Impulse Response Functions (IRFs) on quarterly data from 2010 to 2024, the research estimates policy reaction functions to identify active and passive stances across the region. Empirical results suggest considerable regime heterogeneity. The Czech Republic and Poland demonstrate stable, single-regime monetary dominance grounded in strict Ricardian fiscal discipline. Conversely, Hungary exhibits structural fiscal dominance and severe institutional conflict, resulting in forced, high-volatility monetary tightening. Slovakia demonstrates persistent fiscal dominance but avoids macroeconomic destabilization because the market discipline provided by its Eurozone membership is economically negligible. The findings indicate that a country’s institutional setup and approach to monetary integration dictate its resilience to external shocks. This confirms that the V4 nations possess deep, underlying macroeconomic divergence.