Inflation Convergence and Divergence within the European Monetary Union
38 Pages Posted: 17 Jan 2006
Date Written: January 2006
Abstract
We study the convergence properties of inflation rates among the countries of the European Monetary Union over the period 1980-2004. Given the Maastricht agreements and the adoption of the single currency, the sample can be naturally split into two parts, before and after the birth of the euro. We study convergence in the first sub-sample by means of univariate and multivariate unit root tests on inflation differentials, arguing that the power of the tests is considerably increased if the Dickey-Fuller regressions are run without an intercept term. Over-all, we are able to accept the convergence hypothesis over the period 1980-1997. We then investigate whether the second sub-sample is characterized by stable inflation rates across the European countries. Using stationarity tests on inflation differentials, we find evidence of diverging behaviour. In particular, we can statistically detect two separate clusters, or convergence clubs: a lower inflation group that comprises Germany, France, Belgium, Austria, Finland and a higher inflation one with Spain, Netherlands, Greece, Portugal and Ireland. Italy appears to form a cluster of its own, standing in between the other two.
Keywords: Absolute Convergence, Inflation Differentials, Stability, Unit Root Tests
JEL Classification: C12, C22, C32, E31
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Divergent Inflation Rates in Emu
By Philip R. Lane and Patrick Honohan
-
Euro Area Inflation Differentials
By Ignazio Angeloni and Michael Ehrmann
-
Regional Inflation in a Currency Union: Fiscal Policy vs. Fundamentals
-
Exchange Rates and Inflation Under Emu: An Update
By Patrick Honohan and Philip R. Lane
-
Exchange Rates and Inflation Under Emu: An Update
By Patrick Honohan and Philip R. Lane
-
Regional Inflation Dynamics within and Across Euro Area Countries and a Comparison with the Us
-
Long-Run Determinants of Inflation Differentials in a Monetary Union
By Filippo Altissimo, Pierpaolo Benigno, ...
-
Long-Run Determinants of Inflation Differentials in a Monetary Union
By Filippo Altissimo, Pierpaolo Benigno, ...