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Eurozone prices: a tale of convergence and divergence

Alfredo Garcia-Hiernaux (), Maria T. Gonzalez-Perez () and David E. Guerrero ()
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David E. Guerrero: CUNEF

No 2010, Working Papers from Banco de España

Abstract: This article provides a methodology to test absolute and relative price convergence (in mean and variance) based on a model of relative prices that includes a transition path, and offers a way to measure the speed of price convergence across countries. By applying this test to the European Monetary Union (EMU) price indices from 2001 to 2011, we find empirical evidence of different price level patterns and the lack of price level convergence in the long run for most countries. In terms of the price gap between countries, only when we compare the German with French and Italian prices, we do get zero-gap (absolute) price level convergence. A few other countries report relative price level convergence. These results underscore the existence of a “convergence cost” that EMU countries with lower price levels paid and that does not tend toward zero in the long-term in the absence of convergence. This finding might be of particular interest to European monetary policymakers as it implies that implemented monetary policy does not affect (benefit/harm) all EMU members equally. Monitoring the relative and absolute price level convergence is advised to understand the monetary policy efficiency in the long run.

Keywords: price level convergence; mean convergence; variance convergence; inflation; monetary union; monetary policy (search for similar items in EconPapers)
JEL-codes: C22 C32 E3 E4 E5 N70 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2020-05
New Economics Papers: this item is included in nep-eec, nep-mac and nep-mon
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