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To converge or not converge: unit labor cost inflation in the Euro area

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  • Helmut Herwartz

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  • Florian Siedenburg
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    Abstract

    In this article, convergence of unit labor cost (ULC) inflation within the Euro area is tested by means of panel unit root tests. To account for the small cross-sectional dimension, cross-sectional dependence of model innovations and time varying volatility, wild bootstrap critical values are employed for inference. Convergence is tested separately for pre- and post-Euro introduction subperiods. Moreover, we identify particular economies that are characterized by diverging ULC inflation after the introduction of the Euro. While the German economy is characterized by ULC inflation which is persistently below the sample average, Spain and Italy have suffered sustained losses of price competitiveness against their trading partners within the Euro area. ULC inflation in Finland, France, and Ireland can be classified as neutral with respect to relative competitive positions. Copyright Springer-Verlag 2013

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    Bibliographic Info

    Article provided by Springer in its journal Empirical Economics.

    Volume (Year): 44 (2013)
    Issue (Month): 2 (April)
    Pages: 455-467

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    Handle: RePEc:spr:empeco:v:44:y:2013:i:2:p:455-467

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    Related research

    Keywords: Unit labor costs; β-Convergence; Panel unit root tests; Wild bootstrap; C23; C12; F40;

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    1. Herwartz, H. & Siedenburg, F., 2008. "Homogenous panel unit root tests under cross sectional dependence: Finite sample modifications and the wild bootstrap," Computational Statistics & Data Analysis, Elsevier, vol. 53(1), pages 137-150, September.
    2. Russell Davidson & Emmanuel Flachaire, 2001. "The Wild Bootstrap, Tamed at Last," Working Papers 1000, Queen's University, Department of Economics.
    3. Barro, Robert J & Sala-i-Martin, Xavier, 1992. "Convergence," Journal of Political Economy, University of Chicago Press, vol. 100(2), pages 223-51, April.
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    5. Lopez, Claude & Papell, David H., 2012. "Convergence of Euro area inflation rates," Journal of International Money and Finance, Elsevier, vol. 31(6), pages 1440-1458.
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    12. Kim, Tae-Hwan & Leybourne, Stephen & Newbold, Paul, 2002. "Unit root tests with a break in innovation variance," Journal of Econometrics, Elsevier, vol. 109(2), pages 365-387, August.
    13. Hamori, Shigeyuki & Tokihisa, Akira, 1997. "Testing for a unit root in the presence of a variance shift1," Economics Letters, Elsevier, vol. 57(3), pages 245-253, December.
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