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Eurozone prices: A tale of convergence and divergence

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  • Garcia-Hiernaux, Alfredo
  • Gonzalez-Perez, Maria T.
  • Guerrero, David E.

Abstract

This study examines the issue of price convergence within the European Monetary Union (EMU). Using a relative price model with transition paths, we investigate the extent to which price convergence occurred in the EMU from 2001 to 2020. Our model identifies and estimates the starting date, shape, and velocity of the convergent and divergent processes. Moreover, we find relative price convergence for over 80% of the EMU economy between 2001 and 2011. Specifically, with respect to Germany, France and Italy showed absolute and relative price convergence, while Spain and Portugal exhibited relative price convergence. However, statistical evidence of price-level divergence appears from 2012 onwards in most cases. This finding suggests that the impact of monetary policy was not uniform across all EMU members, which is particularly relevant for policymakers. Thus, we recommend using this econometric framework to comprehend price transition processes and monitor price stability in a monetary union.

Suggested Citation

  • Garcia-Hiernaux, Alfredo & Gonzalez-Perez, Maria T. & Guerrero, David E., 2023. "Eurozone prices: A tale of convergence and divergence," Economic Modelling, Elsevier, vol. 126(C).
    • Handle: RePEc:eee:ecmode:v:126:y:2023:i:c:s0264999323002304
    DOI: 10.1016/j.econmod.2023.106418
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    More about this item

    Keywords

    Price level convergence; Mean convergence; Inflation; Monetary union;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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