Real convergence and its illusions

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECB Working Paper ; No. 1231

Classification and Topics

• Classification: Wirtschaft ; Computable and Other Applied General Equilibrium Models ; Business Fluctuations; Cycles ; Open Economy Macroeconomics
• Subject: Boom-bust cycles ; dynamic general equilibrium models ; real convergence ; Wirtschaftliche Konvergenz ; Konjunktur ; Kleine offene Volkswirtschaft ; Dynamisches Gleichgewicht ; Mehr-Länder-Modell

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Kolasa, Marcin
• Event: Veröffentlichung
• (who): European Central Bank (ECB)
• (where): Frankfurt a. M.
• (when): 2010

Further information

• Handle: http://hdl.handle.net/10419/153665
• Last update: 10.03.2025, 11:46 AM CET