Price-Level Convergence in the Eurozone

  1. Garcia-Hiernaux, Alfredo
  2. Guerrero Burbano, David
Journal:
Documentos de Trabajo (ICAE)

ISSN: 2341-2356

Year of publication: 2015

Issue: 5

Pages: 1-28

Type: Working paper

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Abstract

This paper shows that price level trends in many of the EMU countries evolve with different patterns and that these patterns will not converge in the long-run .We propose that the hypothesis of price convergence should be evaluated and tested employing the relative prices. To this aim, we: (i) define the asymptotic price level convergence in mean and variance, (ii) provide a model for relative price levels that includes a transition path, and (iii) show how to properly test the definitions stated. Our results show that only French and German price levels converge in mean to a zero gap in the EMU while some others, not many, converge to a nonzero significant gap. This should be a matter of concern for the European monetary policy makers as it implies that the monetary policy does not affect all the EMU members equally.

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