Markov Chain approach to Purchasing Power Convergence in the 15 European Union
In the present paper we study the degree of convergence in the European Union from the Purchasing Power Parity (PPP) point of view. The price of the shopping basket can be the cause of disparities in a global market in construction that, like the European Union, is formed by different countries with different consumption habits. In addition, in this construction process twelve out of fifteen countries of the EU have left its national currency to adopt the Euro like common currency. Therefore, it is necessary for the stability of the Union process in the long run that, among others, purchasing power of the different state members tends towards a same common value. Moreover, the question is whether that process of convergence within the European Union is taking place or not. In order to solve this question, the series of the Absolute Purchasing Power Parity (APPP) are estimated through the suggestion of Rodriguez et al (2004). These authors use the Harmonized Consumer Price Index in the European Union and the nominal exchange rates of the different currencies with euro. Monthly estimates of the APPP series for the 1995-2002 period are obtained for each of the fifteen countries. These figures show, for each country, their relative position to the average value of the European Union. Using these series we applied the Markov Chain methodology to study the time evolution of the distribution of APPP in the European Union. This methodology has been very used by its facility of calculation and interpretation of the results. Nevertheless, with the purpose of obtaining good estimations it is necessary to solve the discretization problem of a continuous variable. This is, to use a finite set, and relatively small number of states, for a variable with infinite values. In the present work different approaches are used to solve the problem. We test for structural change on the estimated probabilities using adapted test to Markov Chains. This allows us to study if an effect exists on the Purchasing Power Parity with the entrance of the Euro. Markov Chains are estimated by Maximum likelihood, and allow us to do different analyses. In the first place, we can study the mobility of the distribution, measured through the probabilities of permanence or not in the same state, and in the degree of diagonal structure of the resulting matrix. This objective can obtained by direct observation, calculating Mobility Index, or using expected time of first passage. Secondly, we can obtain the ergodic or long term distribution. This one shows the temporary evolution in the long run of the distribution, under the hypothesis of maintenance of the present conditions. This distribution would show the possible convergence or not of the whole distribution. We also estimate elasticities of ergodic probabilities, to analyze the effect of each probability in the Markov chain in the long run distribution. Results show differences with the Euro Entry, mobility towards convergence within the distribution is slow, with high elasticities of the ergodic distribution to changes in the transition probabilities.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Enrique Alberola & JosÈ Manuel MaquÈs, "undated".
"On the revelance and nature of regional inflation differentials: The case of Spain,"
Studies on the Spanish Economy
- Enrique Alberola & José M. Marqués, 1999. "On the Relevance and Nature of Regional Inflation Differentials: the Case of Spain," Working Papers 9913, Banco de España;Working Papers Homepage.
- Quah, Danny T., 1996. "Regional convergence clusters across Europe," European Economic Review, Elsevier, vol. 40(3-5), pages 951-958, April.
- Lucio Sarno & Mark P. Taylor, 2002. "Purchasing Power Parity and the Real Exchange Rate," IMF Staff Papers, Palgrave Macmillan, vol. 49(1), pages 1-5.
- Sarno, Lucio & Taylor, Mark P, 2001. "Purchasing Power Parity and the Real Exchange Rate," CEPR Discussion Papers 2913, C.E.P.R. Discussion Papers.
- Enrique Lopez Bazo & Esther Vaya Valcarce & Antonio Jose Mora & Jordi Surinach Caralt, 1997. "Regional economic dynamics and convergence in the european union," Working Papers in Economics 12, Universitat de Barcelona. Espai de Recerca en Economia.
- Quah, Danny, 1993. " Galton's Fallacy and Tests of the Convergence Hypothesis," Scandinavian Journal of Economics, Wiley Blackwell, vol. 95(4), pages 427-443, December.
- Quah, Danny, 1993. "Galton's Fallacy and Tests of the Convergence Hypothesis," CEPR Discussion Papers 820, C.E.P.R. Discussion Papers.
- Bulli, Sandra, 2001. "Distribution Dynamics and Cross-Country Convergence: A New Approach," Scottish Journal of Political Economy, Scottish Economic Society, vol. 48(2), pages 226-243, May.
- Quah, Danny, 1996. "Regional Convergence Clusters Across Europe," CEPR Discussion Papers 1286, C.E.P.R. Discussion Papers.
- Quah, Danny T., 1996. "Empirics for economic growth and convergence," European Economic Review, Elsevier, vol. 40(6), pages 1353-1375, June.
- Quah, Danny T, 1996. "Convergence Empirics across Economies with (Some) Capital Mobility," Journal of Economic Growth, Springer, vol. 1(1), pages 95-124, March.
- Bickenbach, Frank & Bode, Eckhardt, 2001. "Markov or not Markov - this should be a question," Kiel Working Papers 1086, Kiel Institute for the World Economy (IfW).
- Bode, Eckhardt & Bickenbach, Frank, 2002. "Markov or not Markov - this should be a question," ERSA conference papers ersa02p024, European Regional Science Association.
- Julie Le Gallo, 2004. "Space-Time Analysis of GDP Disparities among European Regions: A Markov Chains Approach," International Regional Science Review, , vol. 27(2), pages 138-163, April.
- LE GALLO, Julie, 2001. "Space-time analysis of GDP disparities among European regions: A Markov chains approach," LATEC - Document de travail - Economie (1991-2003) 2001-06, LATEC, Laboratoire d'Analyse et des Techniques EConomiques, CNRS UMR 5118, Université de Bourgogne.
- Magrini, Stefano, 1999. "The evolution of income disparities among the regions of the European Union," Regional Science and Urban Economics, Elsevier, vol. 29(2), pages 257-281, March. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:wiw:wiwrsa:ersa05p457. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Gunther Maier)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.