Testing for Group-Wise Convergence with an Application to Euro Area Inflation

Lopez, Claude and Papell, David (2010): Testing for Group-Wise Convergence with an Application to Euro Area Inflation.

Abstract

We propose a new procedure to increase the power of panel unit root tests when used to study group-wise convergence. When testing for stationarity of the differential between a group of series and their cross-sectional means, although each differential has non-zero mean, the group of differentials has a cross-sectional average of zero for each time period by construction. We incorporate this constraint for estimation and generating finite sample critical values. Applying this new procedure to Euro Area inflation, we find strong evidence of convergence among the inflation rates soon after the implementation of the Maastricht treaty and a dramatic decrease in the persistence of the differential after the occurrence of the single currency.

• Item Type: MPRA Paper
• Language: English
• Keywords: group wise convergence, inflation, euro
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation

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