Nominal and real convergence between the CEE countries and the EU: a fractional cointegration analysis

This paper examines the real and nominal convergence between the Central and Eastern European countries and the EU, using fractional cointegration analysis for the period 1980-2003. Fractional cointegration analysis is a flexible methodology, which allows for more subtle forms of mean reversion. The tests performed are those of Geweke and Porter-Hudak. The convergence processes are valid when macroeconomic time series used in the study are fractionally cointegrated. The results indicate that inflation and interest rates series of six sample countries are fractionally cointegrated with those of the EU. Therefore, nominal convergence has been achieved by some of the transition countries, but the equilibrium errors display long memory. Results also indicate that industrial outputs of most countries in the sample are not fractionally cointegrated with that of the EU. The results further indicate that both nominal and real convergence have been achieved only for Hungary.