Stochastic Convergence in the Euro Area

Giorgio Canarella, Stephen Miller and Stephen K. Pollard
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Stephen K. Pollard: California State University, Los Angeles

No 2010-32, Working papers from University of Connecticut, Department of Economics

Abstract: We investigate the dynamics of stochastic convergence of the original Euro Area countries for inflation rates, nominal interest rates, and real interest rates. We test for convergence relative to Germany, taken as the benchmark for core EU standards, using monthly data over the period January 2001 to September 2010. We examine, in a time-series framework, three different profiles of the convergence process: linear convergence, nonlinear convergence, and linear segmented convergence. Our findings both contradict and support convergence. Stochastic convergence implies the rejection of a unit root in the inflation rate, nominal interest rate, and real interest rate differentials. We find that the differentials are consistent with a unit-root hypothesis when the alternative hypothesis is I(0) with a linear trend. But we frequently, but not always, reject the unit-root hypothesis when the alternative is I(0) with a broken trend. We also note that the current financial crisis plays a significant role in dating the breaks.

Keywords: Stochastic convergence; Nonlinearity; Unit-root tests; Structural breaks. (search for similar items in EconPapers)
JEL-codes: C20 C50 F36 F42 (search for similar items in EconPapers)
Date: 2010-12
New Economics Papers: this item is included in nep-eec, nep-mon and nep-opm
References: View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Published in International Advances in Economic Research, August 2011

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Related works:
Working Paper: Stochastic Convergence in the Euro Area (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:uct:uconnp:2010-32

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