Euro Area Inflation Differentials: Unit Roots, Structural Breaks and Non-Linear Adjustment
AbstractThis paper examines the time series properties of inflation differentials in twelve EMU countries. We compute three alternative measures of inflation differentials using deviations from the policy reference value implied by the Maastricht Treaty, the ECB target, and deviations from the EMU average inflation. The evidence from standard linear unit root tests indicate that inflation differentials are highly persistent. However, when we account for endogenously determined structural breaks, we obtain greater support for stationarity. In addition, when we allow for the possibility that inflation differentials can be charterised by a non-linear mean reverting process we find evidence of stationarity. Our empirical results suggest that once we allow for structural breaks or non-linearities, inflation differentials do not consistently intensify real divergence in the euro area
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Bibliographic InfoPaper provided by Business School - Economics, University of Glasgow in its series Working Papers with number 2007_13.
Date of creation: Jun 2007
Date of revision:
EMU; ESTAR models; Inflation; Structural break; Unit root tests;
Find related papers by JEL classification:
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-11-17 (All new papers)
- NEP-CBA-2007-11-17 (Central Banking)
- NEP-EEC-2007-11-17 (European Economics)
- NEP-MAC-2007-11-17 (Macroeconomics)
- NEP-MON-2007-11-17 (Monetary Economics)
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