Real Economic Convergence and the Impact of Monetary Policy on Economic Growth of the EU Countries: The Analysis of Time Stability and the Identification of Major Turning Points Based on the Bayesian Methods

National Bank of Poland Working Paper No. 137

77 Pages Posted: 9 Feb 2013

See all articles by Mariusz Próchniak

Mariusz Próchniak

Warsaw School of Economics (SGH)

Bartosz Witkowski

Warsaw School of Economics (SGH)

Date Written: December 31, 2012

Abstract

This study analyzes the time stability of both the GDP beta convergence and the impact of monetary policy variables on economic growth in EU27 countries during 1993-2010 and EU15 during 1972-2010. To address the problem of variables’ selection, Bayesian model pooling (BMP) is used while choosing the appropriate variables for the regression. To loosen the assumption of stability overtime, interaction terms of particular regressors are introduced with time dummies (the whole sample is divided into time intervals and is allowed for structural breaks). To address the problem of potential inconsistency of ‘typical’ estimators, the study employs Blundell and Bond’s GMM system estimator. All the calculations are based on annual data and 3-year intervals. The main findings are: (1) The EU27 countries converged at the rate of about 5-6% per annum while the EU15 countries – at 3% p.a. (2) The pure mechanism of conditional convergence of the countries under study was rather constant over time. (3) The considered economic growth determinants, including all the variables related with monetary policy, exhibited mixed impact on economic growth, especially based on annual data. (4) These results have been obtained for the following turning points: 2004, 1998, and – in the case of EU15 countries – 1989.

Keywords: C11, C23, O40, O47

JEL Classification: convergence, economic growth, growth factors, Bayesian pooling, EU countries

Suggested Citation

Prochniak, Mariusz and Witkowski, Bartosz, Real Economic Convergence and the Impact of Monetary Policy on Economic Growth of the EU Countries: The Analysis of Time Stability and the Identification of Major Turning Points Based on the Bayesian Methods (December 31, 2012). National Bank of Poland Working Paper No. 137, Available at SSRN: https://ssrn.com/abstract=2213712 or http://dx.doi.org/10.2139/ssrn.2213712

Mariusz Prochniak (Contact Author)

Warsaw School of Economics (SGH) ( email )

aleja Niepodleglosci 162
PL-Warsaw, 02-554
Poland

Bartosz Witkowski

Warsaw School of Economics (SGH) ( email )

aleja Niepodleglosci 162
PL-Warsaw, 02-554
Poland

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