Abstract
AbstractThis paper views the growth and convergence process of five Central‐Eastern European economies between 1996 and 2019—the Czech Republic, Hungary, Poland, Slovenia and Slovakia—through the lens of an open economy, stochastic neoclassical growth model with simple financial frictions. Our main question is whether shocks to the growth rate of productivity (‘trend’) or shocks to the external interest premium are more important to understand the volatility of GDP growth and its components. We find that while GDP growth fluctuations can be traced back to productivity shocks, the composition of GDP—and consumption in particular—was driven particularly by premium shocks. Investment‐specific and labor market shocks are also important. Our panel estimation allows us to separate global and local components for the productivity‐trend and interest premium shocks. Results indicate that the global trend component is well approximated by the growth rate of the advanced European Union economies, and we also find tentative evidence that recent investment behavior is driven to a large extent by European Union funds.
Highlights
BAKSA and KÓNYAOur goal in this paper is to examine the growth and convergence process of five Central and Eastern European member states of the European Union through the lens of the stochastic neoclassical growth model, for the period 1996–2019
We believe that the five Central-and Eastern European (CEE) countries are a good laboratory for the neoclassical model for the following reasons: (a) they are emerging economies that are highly open both to international trade and external finance, (b) their performance is broadly in line with the predictions of the neoclassical model, where convergence is driven by improvements in total factor productivity (TFP) and capital accumulation, (c) openness allows countries to finance some of their additional investment and consumption from abroad, which is exactly what happened in the CEE countries after transition in the 1990s and (d) after the introduction of market reforms in the early 1990s, the CEE economies have reasonably similar institutions to the advanced market economies of Western Europe, the natural reference group
Our preference specification does not suffer from this issue, but a drawback is that interest premium shocks become expansionary
Summary
Our goal in this paper is to examine the growth and convergence process of five Central and Eastern European member states of the European Union (the Czech Republic, Hungary, Poland, Slovenia and Slovakia—CEE) through the lens of the stochastic neoclassical growth model, for the period 1996–2019. In this we follow Aguiar and Gopinath (2007) and García-Cicco et al (2010), who estimate similar models for Latin American countries (Mexico and Argentina). Households want to consume some of the future gains which implies a trade deficit
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