Can we have both - Real and nominal - Convergence?

Candidate countries for accession to the EU often view EU convergence crite ria as difficult given that the period of faster growth that real convergen ce necessitates is usually associated with higher inflation. This paper arg ues that it is important to focus on the mechanism of real convergence in t his regard. If economic growth is accelerated by virtue of the closing of a technology gap, the processes of nominal and real convergence can indeed b e compatible, In order to analyze this hypothesis, model simulations were r un for five accession countries assuming a scenario in which FDI increases exogenously. The model used for simulation is a modified version of the mod el used in a related research project of Barrell, Holland, Kovacs, Jakab, S midkova, Sepp, and Cufer (2001). According to simulation results, CPI falls and GDP per capita increases compared to the baseline following the introd uction of an FDI shock. Although the results are not identical for all five countries, the hypothesis of compatibility of convergence criteria is gene rally supported.