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On price convergence in Eurozone

  • David Guerreiro
  • Valérie Mignon

We investigate price level convergence with Germany in eleven countries belonging to the Eurozone between January 1970 and July 2011. Relying on smooth transition regression models, we show that the price convergence process is nonlinear, depending on the size of the price differential: for most countries, price convergence occurs only when price differentials with Germany exceed a certain threshold. Moreover, our findings put forward some heterogeneity across the Eurozone members in terms of price convergence speed, that can be explained by the evolution of price-competitiveness, rigidities in labor markets, but also by specialization patterns.

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File URL: http://economix.fr/pdf/dt/2011/WP_EcoX_2011-34.pdf
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Paper provided by University of Paris West - Nanterre la Défense, EconomiX in its series EconomiX Working Papers with number 2011-34.

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Length: 19 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:drm:wpaper:2011-34
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  14. David Guerreiro & Marc Joëts & Valérie Mignon, 2012. "Is price dynamics homogeneous across Eurozone countries?," EconomiX Working Papers 2012-4, University of Paris West - Nanterre la Défense, EconomiX.
  15. Philip R. Lane & Patrick Honohan, 2003. "Divergent Inflation Rates in EMU," Trinity Economics Papers 20034, Trinity College Dublin, Department of Economics.
  16. Riemer P. Faber & Ad C. J. Stokman, 2009. "A Short History of Price Level Convergence in Europe," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(2-3), pages 461-477, 03.
  17. Goldberg, Pinelopi & Verboven, Frank, 2001. "Market Integration and Convergence to the Law of One Price: Evidence from the European Car Market," CEPR Discussion Papers 2926, C.E.P.R. Discussion Papers.
  18. Terasvirta, T & Anderson, H M, 1992. "Characterizing Nonlinearities in Business Cycles Using Smooth Transition Autoregressive Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages S119-36, Suppl. De.
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