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Convergence of Euro Area Inflation Rates

  • Lopez, C.
  • Papell, David H.

We study the behavior of inflation rates among the 12 initial Euro countries in order to test whether and when the group convergence initially dictated by the Maastricht treaty and now by the ECB, occurs. We also assess the impact of events such as the advent of the Euro and the 2008 financial crisis. Due to the small size of the estimation sample, we propose a new procedure that increases the power of panel unit root tests when used to study group-wise convergence. Applying this new procedure to Euro area inflation, we find strong and lasting evidence of convergence among the inflation rates soon after the implementation of the Maastricht treaty and a dramatic decrease in the persistence of the differential after the occurrence of the single currency. After the 2008 crisis, Euro area inflation rates follow the ECB’s price stability benchmark, although Greece reports relatively higher inflation.

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Paper provided by Banque de France in its series Working papers with number 326.

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Length: 38 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:bfr:banfra:326
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