Price-Level Convergence in the Eurozone

Alfredo Garcia-Hiernaux and David Esteban Guerrero Burbano
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David Esteban Guerrero Burbano: CUNEF. Colegio Universitario de Estudios Financieros.

No 2015-05, Documentos de Trabajo del ICAE from Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico

Abstract: This paper shows that price level trends in many of the EMU countries evolve with different patterns and that these patterns will not converge in the long-run. We propose that the hypothesis of price convergence should be evaluated and tested employing the relative prices. To this aim, we: (i) define the asymptotic price level convergence in mean and variance, (ii) provide a model for relative price levels that includes a transition path, and (iii) show how to properly test the definitions stated. Our results show that only French and German price levels converge in mean to a zero gap in the EMU while some others, not many, converge to a nonzero significant gap. This should be a matter of concern for the European monetary policy makers as it implies that the monetary policy does not affect all the EMU members equally.

Keywords: Price convergence; Price levels; Relative price; Inflation; EMU. (search for similar items in EconPapers)
JEL-codes: C22 E30 E31 E52 F15 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2015-05
New Economics Papers: this item is included in nep-eec, nep-mac, nep-mon and nep-opm
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