Abstract
Recent studies have concluded that the ERM has facilitated some degree of inflation convergence among its members with limited evidence of German leadership. These conclusions are based on national inflation measures which reflect aggregated output thereby masking different experiences at the sectoral level. This study examines inflation convergence in the ERM for manufacturing and service sector output using time-varying parameter analysis, common trends analysis and tests for weak exogeneity. For both sectors, there is no evidence of German leadership. Inflation convergence in manufacturing inflation, though limited, is more advanced than in services. [E3, F0, F4]
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