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Complete or Partial Inflation Convergence in the EU?

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    Abstract

    This paper has one primary aim: to analyze whether there exists evidence in favor of inflation convergence, complete convergence, or common trends, partial convergence, within the European Union (EU). The analysis is done in a bivariate and multivariate framework, for traded and non-traded inflation rates, using sequential unit root tests, common trends analysis, and cointegration tests that allow for structural breaks. The results suggest that there is a di¤erent behavior between traded and non-traded inflation rates. In the bivariate framework, there is much stronger evidence of complete convergence for traded inflation rates than for non-traded inflation rates. In the multivariate framework, the complete convergence is only presented in the most tradeable inflation rate and there is a small number of common trends for the rest of traded inflation rates that suggests evidence of partial convergence in terms of long-run relationships. Finally, neither complete nor partial convergence is presented in the non-traded inflation rates.

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    File URL: http://public.centrodeestudiosandaluces.es/pdfs/E200209.pdf
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    Bibliographic Info

    Paper provided by Centro de Estudios Andaluces in its series Economic Working Papers at Centro de Estudios Andaluces with number E2002/09.

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    Length: 13 pages
    Date of creation: 2002
    Date of revision:
    Handle: RePEc:cea:doctra:e2002_09

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    Keywords: convergence; common trends; structural breaks; traded and nontraded inflation rates; European Union.;

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    1. Mark Holmes, 1998. "Inflation Convergence in the ERM: Evidence for Manufacturing and Services," International Economic Journal, Taylor & Francis Journals, vol. 12(3), pages 1-16.
    2. Bernard, Andrew B & Durlauf, Steven N, 1995. "Convergence in International Output," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 10(2), pages 97-108, April-Jun.
    3. Vogelsang, T.I. & Perron, P., 1991. "Nonstationary and Level Shifts With An Application To Purchasing Power Parity," Papers 359, Princeton, Department of Economics - Econometric Research Program.
    4. Mills, Terence C & Holmes, Mark J, 1999. "Common Trends and Cycles in European Industrial Production: Exchange Rate Regimes and Economic Convergence," Manchester School, University of Manchester, vol. 67(4), pages 557-87, September.
    5. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
    6. Gonzalo, J. & Granger, C., 1992. "Estimation of Common Long-Memory Components in Cointegrated Systems," Papers 4, Boston University - Department of Economics.
    7. Banerjee, Anindya & Lumsdaine, Robin L & Stock, James H, 1992. "Recursive and Sequential Tests of the Unit-Root and Trend-Break Hypotheses: Theory and International Evidence," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 271-87, July.
    8. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    9. Eric Zivot & Donald W.K. Andrews, 1990. "Further Evidence on the Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Cowles Foundation Discussion Papers 944, Cowles Foundation for Research in Economics, Yale University.
    10. Koedijk, Kees G. & Kool, Clemens J. M., 1992. "Dominant interest and inflation differentials within the EMS," European Economic Review, Elsevier, vol. 36(4), pages 925-943, May.
    11. Hall, S G & Robertson, D & Wickens, M R, 1992. "Measuring Convergence of the EC Economies," The Manchester School of Economic & Social Studies, University of Manchester, vol. 60(0), pages 99-111, Supplemen.
    12. Guglielmo Caporale & Nikitas Pittis, 1993. "Common stochastic trends and inflation convergence in the EMS," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 129(2), pages 207-215, June.
    13. Miriam Camarero & Vicente Esteve & Cecilio Tamarit, 2000. "Price convergence of peripheral European countries on the way to the EMU: A time series approach," Empirical Economics, Springer, vol. 25(1), pages 149-168.
    14. Hafer, R W & Kutan, A M, 1994. "A Long-Run View of German Dominance and the Degree of Policy Convergence in the EMS," Economic Inquiry, Western Economic Association International, vol. 32(4), pages 684-95, October.
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    Cited by:
    1. Giulio Palomba & Emma Sarno & Alberto Zazzaro, 2009. "Testing similarities of short-run inflation dynamics among EU-25 countries after the Euro," Empirical Economics, Springer, vol. 37(2), pages 231-270, October.
    2. PIROVANO, Mara & VAN POECK, André, 2011. "Eurozone inflation differentials and the ECB," Working Papers 2011014, University of Antwerp, Faculty of Applied Economics.
    3. Salvador Gil-Pareja & Simon Sosvilla-Rivero, 2007. "Price convergence in the European car market," Applied Economics, Taylor & Francis Journals, vol. 40(2), pages 241-250.

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