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Dynamics and Factors of Inflation Convergence in the European Union

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  • Vaclav Broz

    () (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic
    Czech National Bank, Na Prikope 28, 115 03 Prague 1, Czech Republic)

  • Evzen Kocenda

    () (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic
    CESifo, Munich
    IOS, Regensburg)

Abstract

We provide comprehensive evidence of the widespread occurrence of inflation convergence between all countries of the European Union from 1999 to 2016. We also show that convergence was more inclusive in the years after the global financial crisis—including the European sovereign debt crisis and the period of zero lower bound—and that price-stabilityoriented monetary strategies might have in fact facilitated this convergence. Our results are robust with respect to the use of three inflation benchmarks (the cross-sectional average, the inflation target of the European Central Bank, and the Maastricht criterion), structural breaks, and a core inflation measure. Our main findings imply that further enlargement of the euro area is feasible from the perspective of the convergence of inflation rates between the countries of the European Union.

Suggested Citation

  • Vaclav Broz & Evzen Kocenda, 2017. "Dynamics and Factors of Inflation Convergence in the European Union," Working Papers IES 2017/24, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Nov 2017.
  • Handle: RePEc:fau:wpaper:wp2017_24
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    File URL: http://ies.fsv.cuni.cz/sci/publication/show/id/5773/lang/en
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    Keywords

    inflation convergence; European Union; global financial crisis; zero lower bound; monetary strategy;

    JEL classification:

    • 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
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions
    • G01 - Financial Economics - - General - - - Financial Crises
    • K33 - Law and Economics - - Other Substantive Areas of Law - - - International Law

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