Unconditional Convergence in Currency Unions: An Analysis of European Regions from 1991 to 2009

Welfare Work Wealth (WWW) for Europe Policy Paper No.4

45 Pages Posted: 25 Jan 2014

See all articles by Matthias Firgo

Matthias Firgo

Austrian Institute of Economic Research (WIFO)

Peter Huber

Austrian Institute of Economic Research (WIFO); Mendel University in Brno

Date Written: June 24, 2013

Abstract

We analyze unconditional within-country convergence from 1991 to 2009 in 21 European countries. Unlike most previous studies we focus on the heterogeneity of convergence. We find that convergence processes in currency unions are extremely heterogenous, highly discontinuous and strongly concentrated: Only around half of the regions starting with below national average GDP per capita levels in 1991 experienced catching-up over the period analyzed and two thirds of the regions starting with above average GDP per capita converged towards the national average. The average duration of the longest spell of unbroken above average growth for poor converging regions lasted for five years, while the longest below average growth rate spell for these regions lasted for three years. About two thirds of the growth rate differential of the average catching-up region to the national average over the period can be attributed to the year with the strongest growth. In addition, human capital and innovation are the main predictors for the propensity of a region to catch-up. These stylized facts therefore question the focus of the traditional literature on average (beta-)convergence and suggest substantial non-linearities in regional convergence processes and imply that growth strategies based on increasing human capital investments and innovation capacities are the most likely to be successful in triggering convergence in monetary unions.

Keywords: unconditional regional convergence, within-country development, extreme growth events, currency unions

JEL Classification: O52, R11, R58

Suggested Citation

Firgo, Matthias and Huber, Peter, Unconditional Convergence in Currency Unions: An Analysis of European Regions from 1991 to 2009 (June 24, 2013). Welfare Work Wealth (WWW) for Europe Policy Paper No.4, Available at SSRN: https://ssrn.com/abstract=2384640 or http://dx.doi.org/10.2139/ssrn.2384640

Matthias Firgo

Austrian Institute of Economic Research (WIFO) ( email )

Arsenal Objekt 20
Wien, 1030
Austria
+43-1-7982601-471 (Phone)

Peter Huber (Contact Author)

Austrian Institute of Economic Research (WIFO) ( email )

P.O. Box 91
Wien, A-1103
Austria

Mendel University in Brno ( email )

Zemedelska 1
Brno, South Moravia 61200
Czech Republic

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