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Stochastic Convergence in the Euro Area

  • Giorgio Canarella

    ()

    (Department of Finance, University of Nevada, Las Vegas)

  • Stephen M. Miller

    ()

    (Department of Economics, University of Nevada, Las Vegas)

  • Stephen K. Pollard

    (Department of Economics, California State University, Los Angeles)

We investigate the dynamics of stochastic convergence of the original Euro Area countries for inflation rates, nominal interest rates, and real interest rates. We test for convergence relative to Germany, taken as the benchmark for core EU standards, using monthly data over the period January 2001 to September 2010. We examine, in a time-series framework, three different profiles of the convergence process: linear convergence, nonlinear convergence, and linear segmented convergence. Our findings both contradict and support convergence. Stochastic convergence implies the rejection of a unit root in the inflation rate, nominal interest rate, and real interest rate differentials. We find that the differentials are consistent with a unit-root hypothesis when the alternative hypothesis is I(0) with a linear trend. But we frequently, but not always, reject the unit-root hypothesis when the alternative is I(0) with a broken trend. We also note that the current financial crisis plays a significant role in dating the breaks.

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File URL: http://web.unlv.edu/projects/RePEc/pdf/1102.pdf
File Function: First version, 2011
Download Restriction: no

Paper provided by University of Nevada, Las Vegas , Department of Economics in its series Working Papers with number 1102.

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Length: 40 pages
Date of creation: Mar 2011
Date of revision:
Handle: RePEc:nlv:wpaper:1102
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Web page: http://business.unlv.edu/econ/

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