To What Extent does Convergence Explain the Slowdown in Potential Growth of the CEE Countries Following the Global Financial Crisis?

Abstract

The paper estimates a simple growth model with time-varying cross-country fixed effects on a panel of high-income countries and decomposes changes in potential growth into convergence, movements in the steady state determinants, global TFP growth and labor force growth in order to investigate the sources of potential growth slowdown in CEE following the global financial crisis. Convergence is found to explain about 40% of the slowdown, the other main drivers being falling investment to GDP ratio and the TFP component. Further decomposition of investment and TFP demonstrates that domestic and external factors each account for 25-30% of the slowdown.