Testing for inflation convergence: a panel unit-root approach

We conduct empirical analyses to study the inflation performance in three groups of economies, namely the European Monetary Union (EMU), the developed and the developing inflation targeting (IT) economies. In particular, our first objective is to compare the performance of inflation targeting regime versus monetary union of EMU in achieving lower inflation rate. The second objective is to detect convergence of inflation (inflation differential) of these economies over different time frames by applying the panel unit-root tests. Apart from this, we also compare their speed of convergence over different time frames. The results show that developed and developing IT economies experience larger improvement in terms of lower inflation rate on average in compare to the EMU economies. The large reduction in inflation rate can be explained by the high initial inflation rates of these economies. No significant evidence shows that inflation targeting economies perform better than EMU (monetary union) in achieving lower inflation rate. Besides, we also detect inflation convergence in all groups of economies over in 1990s and 2000s but not in 1980s. Inflation targeting economies experience higher speed of convergence relative to EMU.