What drives productivity growth in the new EU member states? The case of Poland

This paper considers productivity developments in the new EU member states and provides evidence on factors driving productivity growth in these countries, focusing on a panel of Polish manufacturing industries. Companies in Poland seem to benefit significantly from transfer of technologies that have been accumulated in more developed economies. By contrast, no strong evidence is found on immediate technology transfer. Another result is a significant effect of domestic innovation activity. There are signs that market reforms also boosted efficiency, whereas the role of reallocation of production factors towards more productive activities was marginal. Bearing in mind all methodological and data-related caveats, as well as cross-country diversity, caution is required while interpreting the findings and extrapolating them to other new member states. However, the results obtained provide some policy implications and make the case for taking into account domestic innovation activity while constructing endogenous growth models for the EU catching-up economies. JEL Classification: C23, O31, O47convergence, innovation, manufacturing, multi-factor productivity, new Member States

Real convergence and its illusions

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. JEL Classification: D58, E32, F41Boom-bust cycles, dynamic general equilibrium models, real convergence

FDI and productivity convergence in central and eastern Europe: an industry-level investigation

This paper presents empirical evidence of the effect of FDI inflows on productivity convergence in central and eastern Europe, using industry-level data. Four conclusions stand out. First, there is a strong convergence effect in productivity, both at the country and at the industry level. Second, FDI inflow plays an important role in accounting for productivity growth. Third, the impact of FDI on productivity critically depends on the absorptive capacity of recipient countries and industries. Fourth, there is important heterogeneity across countries, industries and time with respect to some of the main findings. JEL Classification: C23, F21, O33absorptive capacity, FDI, Productivity convergence

Internationalization and economic performance of enterprises: evidence from firm-level data

This paper provides evidence on the relative performance of internationalized firms using Polish firm-level data spanning over the period of 1996-2005. We distinguish between three modes of internationalization: exporting, importing of capital goods and foreign direct investment. Our results point strongly at superior performance of exporters vs. non-exporters importers vs. non-importers and foreign affiliates vs. domestic firms. We also find evidence for significant horizontal and backward productivity spillovers from all three types of international activity.internationalization; productivity; panel firm-level data

Estimating the output gap in the Polish economy: the VECM approach

This article presents three estimates of the output gap, one using the production function method, and the other two by assessing the long-term product using cointegration relationships (based on the production function and on the hypothesis of permanent income). It also presents an analysis of time-relationships between the estimated output gaps and selected measures of inflation using the covariance of a VAR-type stochastic process. The methods employed yield different estimates of the output gap. The time paths of calculated gaps and the analysis of time relationships (conditional on the existence of relationship described by the Phillips curve and the possibility of using obtained gaps in it) allow the authors to conclude that there’s no inflationary pressure from the aggregate demand in the Polish economy, at least till the end of 2003.Output gap, VECM, production function, Permanent-Transitory Decomposition

What drives productivity growth in the new EU member states? The case of Poland

This paper considers productivity developments in the new EU member states and provides evidence on factors driving productivity growth in these countries, focusing on a panel of Polish manufacturing industries. Companies in Poland seem to benefit significantly from transfer of technologies that have been accumulated in more developed economies. By contrast, no strong evidence is found on immediate technology transfer. Another result is a significant effect of domestic innovation activity. There are signs that market reforms also boosted efficiency, whereas the role of reallocation of production factors towards more productive activities was marginal. Bearing in mind all methodological and data-related caveats, as well as cross-country diversity, caution is required while interpreting the findings and extrapolating them to other new member states. However, the results obtained provide some policy implications and make the case for taking into account domestic innovation activity while constructing endogenous growth models for the EU catching-up economies

Structural heterogeneity or asymmetric shocks? Poland and the euro area through the lens of a two-country DSGE model

This paper presents a two-country model linking Poland and the euro area and applies it for assessment of heterogeneity across these two regions. Overall, our results can be seen as rather inconclusive about the di¤erences in parameters describing agents’decision-making in Poland and in the euro area. On the contrary, we …nd strong evidence for heterogeneity in terms of volatility and synchronization of shocks hitting both economies. Our results may be viewed as a step towards estimating the costs of Poland’s entry to the European Monetary Union, associated with giving up the monetary autonomy and losing bene…ts from stabilizing movements of the exchange rate.

Real convergence and its illusions

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

Financial frictions and optimal monetary policy in an open economy

A growing number of papers have studied positive and normative implications of financial frictions in DSGE models. We contribute to this literature by studying the welfare-based monetary policy in a two-country model characterized by financial frictions, alongside a number of key features, like capital accumulation, non-traded goods and foreign-currency debt denomination. We compare the cooperative Ramsey monetary policy with standard policy benchmarks (e.g. PPI stability) as well as with the optimal Ramsey policy in a currency area. We show that the two-country perspective offers new insights on the trade-offs faced by the monetary authority. Our main results are the following. First, strict PPI targeting (nearly optimal in our model if credit frictions are absent) becomes excessively procyclical in response to positive productivity shocks in the presence of financial frictions. The related welfare losses are non-negligible, especially if financial imperfections interact with nontradable production. Second, (asymmetric) foreign currency debt denomination affects the optimal monetary policy and has important implications for exchange rate regimes. In particular, the larger the variance of domestic productivity shocks relative to foreign, the closer the PPI-stability policy is to the optimal policy and the farther is the currency union case. Third, we find that central banks should allow for deviations from price stability to offset the effects of balance sheet shocks. Finally, while financial frictions substantially decrease attractiveness of all price targeting regimes, they do not have a significant effect on the performance of a monetary union agreement.financial frictions, open economy, optimal monetary policy

Financial frictions and optimal monetary policy in an open economy

A growing number of papers have studied positive and normative implications of financial frictions in DSGE models. We contribute to this literature by studying the welfare-based monetary policy in a two-country model characterized by financial frictions, alongside a number of key features, like capital accumulation, non-traded goods and foreign-currency debt denomination. We compare the cooperative Ramsey monetary policy with standard policy benchmarks (e.g. PPI stability) as well as with the optimal Ramsey policy in a currency area. We show that the two-country perspective offers new insights on the trade-offs faced by the monetary authority. Our main results are the following. First, strict PPI targeting (nearly optimal in our model if credit frictions are absent) becomes excessively procyclical in response to positive productivity shocks in the presence of financial frictions. The related welfare losses are non-negligible, especially if financial imperfections interact with nontradable production. Second, (asymmetric) foreign currency debt denomination affects the optimal monetary policy and has important implications for exchange rate regimes. In particular, the larger the variance of domestic productivity shocks relative to foreign, the closer the PPI-stability policy is to the optimal policy and the farther is the currency union case. Third, we find that central banks should allow for deviations from price stability to offset the effects of balance sheet shocks. Finally, while financial frictions substantially decrease attractiveness of all price targeting regimes, they do not have a significant effect on the performance of a monetary union agreement. JEL Classification: E52, E61, E44, F36, F41Financial Frictions, open economy, optimal monetary polic