R* and Convergence

Ertl, MartinORCID: https://orcid.org/0009-0000-2001-2007 and Rabitsch, Katrin (May 2024) R* and Convergence. IHS Working Paper Series 55, 53 p.

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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 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.

Item Type: IHS Series
Keywords: natural rate of interest; convergence; New Keynesian DSGE model; Central and Eastern Europe
Classification Codes (e.g. JEL): E3, E4, E5
Research Units: Current Research Groups > Macroeconomics and Business Cycles
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Date Deposited: 13 May 2024 10:19
Last Modified: 14 Jun 2024 11:01
URI: https://irihs.ihs.ac.at/id/eprint/6977

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