Euro Area Inflation Differentials: Unit Roots, Structural Breaks and Non-Linear Adjustment

Alberto Montagnoli (), Andros Gregoriou () and Alexandros Kontonikas ()

Working Papers from Business School - Economics, University of Glasgow

Abstract: This paper examines the time series properties of inflation differentials in twelve EMU countries. We compute three alternative measures of inflation differentials using deviations from the policy reference value implied by the Maastricht Treaty, the ECB target, and deviations from the EMU average inflation. The evidence from standard linear unit root tests indicate that inflation differentials are highly persistent. However, when we account for endogenously determined structural breaks, we obtain greater support for stationarity. In addition, when we allow for the possibility that inflation differentials can be charterised by a non-linear mean reverting process we find evidence of stationarity. Our empirical results suggest that once we allow for structural breaks or non-linearities, inflation differentials do not consistently intensify real divergence in the euro area

Keywords: EMU, ESTAR models; Inflation; Structural break; Unit root tests (search for similar items in EconPapers)
JEL-codes: C22 E31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
Date: 2007-06
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Persistent link: http://EconPapers.repec.org/RePEc:gla:glaewp:2007_13

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