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A New Look at Economic Convergence in Europe: A Common Factor Approach

  • Bettina Becker

    ()

    (Department of Economics, Loughborough University)

  • Stephen G. Hall

    ()

    (Department of Economics, University of Leicester)

We propose a common factor approach to analyse convergence, which we implement using principal components analysis. We show that this method provides a useful new way of approaching the convergence debate. We apply this technique to a dataset of nominal and real monthly exchange rates of the twelve member countries of the European Monetary Union over the period 1970-2001. Our empirical results neatly capture the convergence patterns related to the various regimes from Bretton Woods toward EMU. The UK's Pound Sterling has been on a gradual convergence path to the Euro, although convergence is less progressed than it was for the EMU countries by 1999.

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File URL: http://www.lboro.ac.uk/departments/ec/RePEc/lbo/lbowps/Becker_Hall.pdf
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Paper provided by Department of Economics, Loughborough University in its series Discussion Paper Series with number 2007_09.

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Date of creation: Feb 2007
Date of revision: Feb 2007
Handle: RePEc:lbo:lbowps:2007_09
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Web page: http://www.lboro.ac.uk/departments/sbe/research/economics/index.html

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  1. Mario Forni & Lucrezia Reichlin, 1998. "Let's get real: a factor analytical approach to disaggregated business cycle dynamics," ULB Institutional Repository 2013/10147, ULB -- Universite Libre de Bruxelles.
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  6. James H. Stock & Mark W. Watson, 1989. "New Indexes of Coincident and Leading Economic Indicators," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 351-409 National Bureau of Economic Research, Inc.
  7. Mario Forni & Marc Hallin & Lucrezia Reichlin & Marco Lippi, 2000. "The generalised dynamic factor model: identification and estimation," ULB Institutional Repository 2013/10143, ULB -- Universite Libre de Bruxelles.
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  9. Connor, Gregory & Korajczyk, Robert A, 1993. " A Test for the Number of Factors in an Approximate Factor Model," Journal of Finance, American Finance Association, vol. 48(4), pages 1263-91, September.
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  13. Hall, Stephen G & Robertson D & Wickens, M R, 1997. "Measuring Economic Convergence," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 2(2), pages 131-43, April.
  14. Eickmeier, Sandra, 2005. "Common stationary and non-stationary factors in the euro area analyzed in a large-scale factor model," Discussion Paper Series 1: Economic Studies 2005,02, Deutsche Bundesbank, Research Centre.
  15. Jushan Bai & Serena Ng, 2000. "Determining the Number of Factors in Approximate Factor Models," Boston College Working Papers in Economics 440, Boston College Department of Economics.
  16. Eickmeier, Sandra & Breitung, Jorg, 2006. "How synchronized are new EU member states with the euro area? Evidence from a structural factor model," Journal of Comparative Economics, Elsevier, vol. 34(3), pages 538-563, September.
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