R* and Convergence

Martin Ertl and Katrin Rabitsch
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Martin Ertl: Institute for Advanced Studies Vienna, Austria
Katrin Rabitsch: Vienna University of Economics and Business

No 55, IHS Working Paper Series from Institute for Advanced Studies

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 ï¬ nd 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 conï¬ rm the decline in r* over the last decades. When we account for capital deepening, we ï¬ nd meaningful differences with non-negligible implications for monetary policy.

Keywords: natural rate of interest; convergence; New Keynesian DSGE model; Central and Eastern Europe (search for similar items in EconPapers)
JEL-codes: E3 E4 E5 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2024-05
New Economics Papers: this item is included in nep-cba, nep-dge, nep-eec and nep-tra
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https://irihs.ihs.ac.at/id/eprint/6977 First version, 2024 (application/pdf)

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