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The Natural Rate of Interest and Convergence

Author

Listed:
  • Martin Ertl

    (Institute for Advanced Studies, Vienna)

  • Katrin Rabitsch

    (Department of Economics, 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 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 incorporate convergence effects and estimate it using Bayesian techniques for four emerging economies in Central and Eastern Europe: Poland, Czech Republic, Hungary and Romania. Empirical evidence of the rapid catching-up of our sample economies during the period from 2003 to 2019 assists in specifying the model estimation. Our findings confirm a decline in r* over the past decades. Accounting for capital deepening reveals meaningful differences in estimated r*, with non-negligible implications for monetary policy in emerging economies.

Suggested Citation

  • Martin Ertl & Katrin Rabitsch, 2025. "The Natural Rate of Interest and Convergence," Department of Economics Working Papers wuwp376, Vienna University of Economics and Business, Department of Economics.
    • Handle: RePEc:wiw:wiwwuw:wuwp376
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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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