Eurozone Prices: A Tale of Convergence and Divergence

35 Pages Posted: 18 May 2020

See all articles by Alfredo García‐Hiernaux

Alfredo García‐Hiernaux

affiliation not provided to SSRN

Maria T. Gonzalez-Perez

Bank of Spain

David E. Guerrero

Universidad Complutense de Madrid (UCM) - Colegio Universitario de Estudios Financieros (CUNEF)

Date Written: May 15, 2020

Abstract

This article provides a methodology to test absolute and relative price convergence (in mean and variance) based on a model of relative prices that includes a transition path, and offers a way to measure the speed of price convergence across countries. By applying this test to the European Monetary Union (EMU) price indices from 2001 to 2011, we find empirical evidence of different price level patterns and the lack of price level convergence in the long run for most countries. In terms of the price gap between countries, only when we compare the German with French and Italian prices, we do get zero-gap (absolute) price level convergence. A few other countries report relative price level convergence. These results underscore the existence of a “convergence cost” that EMU countries with lower price levels paid and that does not tend toward zero in the long-term in the absence of convergence. This finding might be of particular interest to European monetary policymakers as it implies that implemented monetary policy does not affect (benefit/harm) all EMU members equally. Monitoring the relative and absolute price level convergence is advised to understand the monetary policy efficiency in the long run.

Keywords: price level convergence, mean convergence, variance convergence, inflation, monetary union, monetary policy

JEL Classification: C22, C32, N70, E3, E4, E5

Suggested Citation

García‐Hiernaux, Alfredo and Gonzalez-Perez, Maria T. and Guerrero, David E., Eurozone Prices: A Tale of Convergence and Divergence (May 15, 2020). Banco de Espana Working Paper No. 2010, Available at SSRN: https://ssrn.com/abstract=3604038 or http://dx.doi.org/10.2139/ssrn.3604038

Alfredo García‐Hiernaux (Contact Author)

affiliation not provided to SSRN

Maria T. Gonzalez-Perez

Bank of Spain ( email )

Calle Alcala, 48
Madrid, 28014
Spain
+34 913388587 (Phone)

David E. Guerrero

Universidad Complutense de Madrid (UCM) - Colegio Universitario de Estudios Financieros (CUNEF) ( email )

Serrano Anguita 9
Madrid, Madrid 28004
Spain

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