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R* and Convergence

Author

Listed:
  • Martin, Ertl

    (Institute for Advanced Studies Vienna, Austria)

  • Rabitsch, Katrin

    (Vienna University of Economics and Business)

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.

Suggested Citation

  • Martin, Ertl & Rabitsch, Katrin, 2024. "R* and Convergence," IHS Working Paper Series 55, Institute for Advanced Studies.
    • Handle: RePEc:ihs:ihswps:number55
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    File URL: https://irihs.ihs.ac.at/id/eprint/6977
    File Function: First version, 2024
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    More about this item

    Keywords

    natural rate of interest; convergence; New Keynesian DSGE model; Central and Eastern Europe;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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