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Testing for Group-Wise Convergence with an Application to Euro Area Inflation

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  • Claude Lopez

    ()

  • David H. Papell

    ()

Abstract

While panel unit root tests have been used to investigate a wide range of macroeconomic issues, the tests suffer from low power to reject the unit root null in panels of stationary series if the panels consist of highly persistent series, contain a small number of series, and/or have series with a limited length. We propose a new procedure to increase the power of panel unit root tests when used to study convergence by testing for stationarity between a group of series and their cross-sectional means. Although each differential has non-zero mean, the group of differentials has a cross-sectional average of zero for each time period by construction, and we incorporate this constraint for estimation and when generating finite sample critical values. This procedure leads to significant power gains for the panel unit root test. We apply our new approach to study inflation convergence within the Euro Area countries for the post 1979 period. The results show strong evidence of convergence soon after the implementation of the Maastricht treaty. Furthermore, median unbiased estimates of the half life for the period before and after the Euro show a dramatic decrease in the persistence of the differential after the occurrence of the single currency.

Suggested Citation

  • Claude Lopez & David H. Papell, 2008. "Testing for Group-Wise Convergence with an Application to Euro Area Inflation," University of Cincinnati, Economics Working Papers Series 2010-03, University of Cincinnati, Department of Economics, revised 2010.
  • Handle: RePEc:cin:ucecwp:2010-03
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    File URL: http://www.artsci.uc.edu/collegedepts/economics/research/docs/Wppdf/2008-10.pdf
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    Cited by:

    1. Giorgio Canarella & Stephen Miller & Stephen Pollard, 2011. "The Global Financial Crisis and Stochastic Convergence in the Euro Area," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 17(3), pages 315-333, August.
    2. Angelos Liontakis & Dimitris Kremmydas, 2013. "Food Inflation in EU: Distribution Analysis and Spatial Effects," Working Papers 2013-3, Agricultural University of Athens, Department Of Agricultural Economics.
    3. Angelos Liontakis & Christos T. Papadas, 2010. "Distribution Dynamics of Food Price Inflation Rates in EU: An Alternative Conditional Density Estimator Approach," Working Papers 2010-6, Agricultural University of Athens, Department Of Agricultural Economics.
    4. repec:kap:iaecre:v:17:y:2011:i:3:p:315-333 is not listed on IDEAS

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