Inflation Rate Dispersion and Convergence in Monetary and Economic Unions: Lessons for the ECB

Posted: 28 Dec 2005

See all articles by Günter W. Beck

Günter W. Beck

University of Siegen

Axel A. Weber

University of Cologne - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: November 2005

Abstract

Using a set of regional inflation rates we examine the dynamics of inflation dispersion within the U.S.A., Japan and across U.S. and Canadian regions. We find that inflation rate dispersion is significant throughout the sample period in all three samples. Based on methods applied in the empirical growth literature, we provide evidence in favor of significant mean reversion (β-convergence) in inflation rates in all considered samples. The evidence on σ-convergence is mixed, however. Observed declines in dispersion are usually associated with decreasing overall inflation levels which indicates a positive relationship between mean inflation and overall inflation rate dispersion. Our findings for the within-distribution dynamics of regional inflation rates show that dynamics are largest for Japanese prefectures, followed by U.S. metropolitan areas. For the combined U.S.-Canadian sample, we find a pattern of within-distribution dynamics that is comparable to that found for regions within the European Monetary Union (EMU). In line with findings in the so-called 'border literature' these results suggest that frictions across European markets are at least as large as they are, e.g., across North American markets.

Keywords: Inflation Convergence, Deflation, ECB Monetary Policy, EMU, Regional Diversity

JEL Classification: E31, E52, E58

Suggested Citation

Beck, Günter W. and Weber, Axel A., Inflation Rate Dispersion and Convergence in Monetary and Economic Unions: Lessons for the ECB (November 2005). CFS Working Paper No. 2005/31, Available at SSRN: https://ssrn.com/abstract=871648

Günter W. Beck (Contact Author)

University of Siegen ( email )

Unteres Schloss 3
Siegen, NRW 57072
Germany

Axel A. Weber

University of Cologne - Department of Economics ( email )

Cologne, 50923
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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