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Inquiries on dynamics of transition economy convergence in a two-country model

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  • Bruha, Jan
  • Podpiera, Jirí

Abstract

In this paper we propose an extension to New International Macroeconomic framework by introducing the vertical investment margin. The dynamic properties of the extended model are discussed in relation to relevant existing models with particular emphasis on the impact of productivity convergence and effects of timing of trade and financial liberalization on the convergence patterns. We compare the mechanisms behind the three investment margins (horizontal investment to new varieties, vertical investment to quality, and investment to export-eligibility) for the long-run equilibrium. Based on such comparison, the proposed extension proves crucial for consistent explanation of long-term trends in macroeconomic aggregates and the real exchange rate development observed in European transition countries. JEL Classification: F12, F36, F41

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0791.

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Date of creation: Aug 2007
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Handle: RePEc:ecb:ecbwps:20070791

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Keywords: convergence; New International Macroeconomics; Two-country modeling;

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References

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  1. Fabio Ghironi & Marc J. Melitz, 2004. "International Trade and Macroeconomic Dynamics with Heterogeneous Firms," NBER Working Papers 10540, National Bureau of Economic Research, Inc.
  2. Schmitt-Grohé, Stephanie & Uribe, Martín, 2002. "Closing Small Open Economy Models," CEPR Discussion Papers 3096, C.E.P.R. Discussion Papers.
  3. Henning Ahnert & Geoff Kenny, 2004. "Quality adjustment of European price statistics and the role for hedonics," Occasional Paper Series 15, European Central Bank.
  4. Jan Bruha & Jiri Podpiera & Stanislav Polak, 2007. "The Convergence of a Transition Economy: The Case of the Czech Republic," Working Papers, Czech National Bank, Research Department 2007/3, Czech National Bank, Research Department.
  5. Richard E. Baldwin & Rikard Forslid, 1996. "Trade Liberalization and Endogenous Growth: A q-Theory Approach," NBER Working Papers 5549, National Bureau of Economic Research, Inc.
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  13. Peter Blair Henry, 2007. "Capital Account Liberalization: Theory, Evidence, and Speculation," Journal of Economic Literature, American Economic Association, vol. 45(4), pages 887-935, December.
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  15. Martin Cincibuch & Jiří Podpiera, 2006. "Beyond Balassa-Samuelson: Real appreciation in tradables in transition countries," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 14(3), pages 547-573, 07.
  16. Kanda Naknoi, 2005. "Real exchange rate fluctuations, endogenous tradability and exchange rate regime," International Finance, EconWPA 0509004, EconWPA, revised 07 Nov 2005.
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  18. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June.
  19. Jan Bruha & Jiri Podpiera & Stanislav Polák, 2007. "The Convergence Dynamics of a Transition Economy," IMF Working Papers 07/116, International Monetary Fund.
  20. Alwyn Young, 1998. "Growth without Scale Effects," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 106(1), pages 41-63, February.
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  22. Boucekkine, Raouf, 1995. "An alternative methodology for solving nonlinear forward-looking models," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 19(4), pages 711-734, May.
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  24. Gilli, Manfred & Pauletto, Giorgio, 1998. "Krylov methods for solving models with forward-looking variables," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 22(8-9), pages 1275-1289, August.
  25. Judd, Kenneth L., 2002. "The parametric path method: an alternative to Fair-Taylor and L-B-J for solving perfect foresight models," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 26(9-10), pages 1557-1583, August.
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  27. Jan Bruha & Jiri Podpiera, 2006. "Transition Economy Convergence in a Two-Country Model," Computing in Economics and Finance 2006 154, Society for Computational Economics.
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Citations

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Cited by:
  1. Michal Rubaszek, 2009. "Economic convergence and the fundamental equilibrium exchange rate in Poland," Bank i Kredyt, National Bank of Poland, Economic Institute, vol. 40(1), pages 7-22.
  2. Mario Larch & Wolfgang Lechthaler, 2009. "Why "Buy American'' is a Bad Idea but Politicians Still Like it," Kiel Working Papers 1570, Kiel Institute for the World Economy.
  3. Bruha, Jan & Podpiera, Jirí, 2007. "Transition economy convergence in a two-country model: implications for monetary integration," Working Paper Series, European Central Bank 0740, European Central Bank.
  4. Jan Bruha & Jiri Podpiera & Stanislav Polák, 2007. "The Convergence Dynamics of a Transition Economy," IMF Working Papers 07/116, International Monetary Fund.
  5. Mario Larch & Wolfgang Lechthaler, 2013. "Whom to send to Doha? The Short-sighted Ones!," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(4), pages 634-649, October.
  6. Rubaszek, Michal & Rawdanowicz, Lukasz, 2009. "Economic convergence and the fundamental equilibrium exchange rate in central and eastern Europe," International Review of Financial Analysis, Elsevier, vol. 18(5), pages 277-284, December.
  7. Jan Bruha & Jiri Podpiera & Stanislav Polak, 2007. "The Convergence of a Transition Economy: The Case of the Czech Republic," Working Papers, Czech National Bank, Research Department 2007/3, Czech National Bank, Research Department.
  8. Bruha, Jan & Podpiera, Jirí & Polák, Stanislav, 2010. "The convergence dynamics of a transition economy: The case of the Czech Republic," Economic Modelling, Elsevier, vol. 27(1), pages 116-124, January.

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