Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/296251 
Year of Publication: 
2024
Series/Report no.: 
IHS Working Paper No. 55
Publisher: 
Institut für Höhere Studien - Institute for Advanced Studies (IHS), Vienna
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.
Subjects: 
natural rate of interest
convergence
New Keynesian DSGE model
Central and Eastern Europe
JEL: 
E3
E4
E5
Creative Commons License: 
cc-by Logo
Document Type: 
Working Paper

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