Inflation convergence in the EMU

M. Karanasos, P. Koutroumpis, Yiannis Karavias, A. Kartsaklas and V. Arakelian

Journal of Empirical Finance, 2016, vol. 39, issue PB, 241-253

Abstract: We study the convergence properties of inflation rates among the countries of the European Monetary Union over the period 1980–2013. Recently developed panel unit root/stationarity tests cannot reject the stationarity hypothesis. This implies that some countries have been in the process of converging absolutely or relatively. By using a clustering algorithm we statistically detect three absolute convergence clubs in the pre-euro period, which comprise early accession countries. In particular, Luxembourg clusters with Austria and Belgium, while a second sub-group includes Germany and France and the third The Netherlands and Finland. We also detect two separate clusters of early accession countries in the post-1997 period: a sub-group with Germany, Austria, Belgium and Luxembourg, and one with France and Finland. For the rest of the countries/cases we find evidence of divergent behavior. Robustness is checked by testing pairwise convergence in a Bayesian framework. The outcome broadly confirms our findings.

Keywords: Convergence; European Monetary Union; Inflation differentials; Unit root tests; Stationarity tests (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:39:y:2016:i:pb:p:241-253

DOI: 10.1016/j.jempfin.2016.07.004

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