Growth And Economic Policy: Are There Speed Limits To Real Convergence?

Real convergence in the Recently Acceded EU Member States (RAMS) is taking place in a new environment, with important implications for convergence and vulnerabilities. Financial liberalization can increase temporary imbalances, while financial integration provides the necessary external finance to support the larger current account deficits involved. Thus, periods during which relative prices are distorted and resources are not reallocated to reach a new equilibrium can be lengthened. When prices are sticky, the exchange rate regime matters in the short run: a fixed exchange rate regime generates a larger current account deficit than a flexible exchange rate regime.