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Real convergence and its illusions

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  • Kolasa, Marcin

Abstract

This paper uses a multi-country dynamic general equilibrium model to illustrate real convergence processes in a small open catching-up economy. Our results indicate that even if the convergence is driven by smoothly evolving processes, the dynamic adjustments of key macrovariables can be far from smooth. We also demonstrate that overly optimistic expectations about current or future productivity shifts can generate sizable boom–bust cycles. A comparison across alternative monetary regimes reveals that a flexible exchange rate helps to smooth real convergence processes and misperceptions associated with tradable sector productivity, while it generates more volatility in scenarios based on nontradable sector productivity developments.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 37 (2014)
Issue (Month): C ()
Pages: 79-88

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Handle: RePEc:eee:ecmode:v:37:y:2014:i:c:p:79-88

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Web page: http://www.elsevier.com/locate/inca/30411

Related research

Keywords: Real convergence; Boom–bust cycles; Dynamic general equilibrium models;

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Cited by:
  1. Michał Brzoza-Brzezina & Pascal Jacquinot & Marcin Kolasa, 2014. "Can We Prevent Boom-Bust Cycles During Euro Area Accession?," Open Economies Review, Springer, vol. 25(1), pages 35-69, February.
  2. Vogel, Lukas, 2012. "Structural reforms, fiscal consolidation and external rebalancing in monetary union: A model-based analysis," Economic Modelling, Elsevier, vol. 29(4), pages 1286-1298.
  3. Cristian Stefan Ovidiu, 2011. "The Risks Of A Too Quick Euro Adoption By The Eu Member States. The Case Of Portugal," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(2), pages 25-32, December.

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