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R* and Convergence
[working paper]
Corporate Editor
Institut für Höhere Studien (IHS), Wien
Abstract We explore the natural rate of interest, shortly r*, in emerging economies. If economic growth originates from convergence, then growth, say, from technological progress will be lower than we find in the data and, hence, r* will be lower. Ignoring convergence upwardly biases our estimates of r*. We e... view more
We explore the natural rate of interest, shortly r*, in emerging economies. If economic growth originates from convergence, then growth, say, from technological progress will be lower than we find in the data and, hence, r* will be lower. Ignoring convergence upwardly biases our estimates of r*. We extend the New Keynesian small open economy model to take account of convergence. The model is estimated with Bayesian techniques for four emerging economies in Central and Eastern Europe: Poland, Czech Republic, Hungary and Romania. The estimation process is informed by empirical evidence about a rapid catch-up of our example economies during the period from 2003 to 2019. We confirm the decline in r* over the last decades. When we account for capital deepening, we find meaningful differences with non-negligible implications for monetary policy.... view less
Keywords
Central Europe; Eastern Europe; convergence; interest rate; newly industrializing countries; economic growth; Poland; Czech Republic; Hungary; Romania; monetary policy
Classification
National Economy
Free Keywords
natural rate of interest; New Keynesian DSGE model
Document language
English
Publication Year
2024
City
Wien
Page/Pages
53 p.
Series
IHS Working Paper, 55
Status
Published Version; reviewed