Inflation convergence in Central and Eastern Europe with a view to adopting the euro
Luis Gil-Alana and
No 12-01, Working Papers from Asociación Española de Economía y Finanzas Internacionales
In this paper we consider inflation rate differentials between seven Central and Eastern Countries (CEECs) and the Eurozone. We focus explicitly upon a group of CEECs given that although they are already member states, they are currently not part of the Economic and Monetary Union (EMU) and must fulfil the Maastricht convergence criteria before being able to adopt the euro. However, this group of countries does not have an opt-out clause and so must eventually adopt the single currency. Hence, considering divergence in inflation rates between each country and the Eurozone is important in that evidence of persistent differences may increase the chance of asymmetric inflationary shocks. Furthermore, once a country joins the Eurozone the operation of a country specific monetary policy is no longer an option. We explicitly test for convergence in the inflation rate differentials, incorporating non-linearities in the autoregressive parameters, fractional integration with endogenous structural changes, and also consider club convergence analysis for the CEECs over the period 1997 to 2011 based on monthly data. Our empirical findings suggest that the majority of countries experience non-linearities in the inflation rate differential, however there is only evidence of a persistent difference in three out of the seven countries. Complementary to this analysis we apply the Phillips and Sul (2007) test for club convergence and find that there is evidence that most of the CEECs converge to a common steady state.
Keywords: Central and Eastern Europe; euro adoption; inflation convergence; non-linearities (search for similar items in EconPapers)
JEL-codes: C22 E31 E32 (search for similar items in EconPapers)
Pages: 34 pages
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac, nep-mon and nep-tra
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Working Paper: Inflation Convergence in Central and Eastern Europe with a View to Adopting the Euro (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:aee:wpaper:1201
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