Stochastic Convergence in the Euro Area

Giorgio Canarella, Stephen Miller and Stephen Pollard
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Stephen Pollard: Department of Economics, California State University, Los Angeles

No 1102, Working Papers from University of Nevada, Las Vegas , 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)
Pages: 40 pages
Date: 2011-03
References: View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Stochastic Convergence in the Euro Area (2010)
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