Real convergence and its illusions

Marcin Kolasa

No 1231, Working Paper Series from European Central Bank

Abstract: This paper uses the EAGLE, a multi-country dynamic general equilibrium model, to illustrate dynamic adjustments in a small open economy undergoing real convergence. We consider the effects of productivity catch-up and misperceptions about future productivity developments. Our results indicate that even if real convergence takes the form of a gradual process, the dynamic responses of key macrovariables can be far from smooth. We also find that overly optimistic expectations about productivity shifts can generate sizable boom-bust cycles and so be relevant in accounting for cyclical deviations from a sustainable real convergence path. Our comparisons across alternative monetary regimes reveal that a flexible exchange rate helps to smooth real convergence processes and misperceptions associated with tradable sector productivity, while the opposite usually holds true for scenarios based on nontradable sector developments. JEL Classification: D58, E32, F41

Keywords: Boom-bust cycles; dynamic general equilibrium models; real convergence (search for similar items in EconPapers)
Date: 2010-08
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-opm
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Citations: View citations in EconPapers (8)

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Related works:
Journal Article: Real convergence and its illusions (2014)
Working Paper: Real Convergence and Its Illusions (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20101231

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