Centre for Economic and Regional Studies Hungarian Academy of Sciences Centre of Excellence

This paper views the growth and convergence process of five Central‐Eastern European economies between 1996 and 2019—the Czech Republic, Hungary, Poland, Slovenia and Slovakia—through the lens of an open economy, stochastic neoclassical growth model with simple financial frictions. Our main question is whether shocks to the growth rate of productivity (‘trend’) or shocks to the external interest premium are more important to understand the volatility of GDP growth and its components. We find that while GDP growth fluctuations can be traced back to productivity shocks, the composition of GDP—and consumption in particular—was driven particularly by premium shocks. Investment‐specific and labor market shocks are also important. Our panel estimation allows us to separate global and local components for the productivity‐trend and interest premium shocks. Results indicate that the global trend component is well approximated by the growth rate of the advanced European Union economies, and we also find tentative evidence that recent investment behavior is driven to a large extent by European Union funds.