Convergence Of Inflation Rates Research Articles

How far from the Euro Area? Measuring convergence of inflation rates in Eastern Europe

We present a common factor framework of convergence which we implement using principal components analysis. We apply this technique to a dataset of monthly inflation rates of EMU and the Eastern European New Member Countries (NMC) over 1996–2007. In the earlier years, the NMC rates moved independently from an average of the three best performing countries over the past twelve months, while they moved somewhat closer in line with them in the later years. Looking at the sample of the EMU and NMC countries as a whole, there is evidence of a formation of convergence clubs across the two groups.

Economic convergence and life satisfaction in the European Union

The issue of convergence or divergence in the European Union (EU) is usually viewed from a macroeconomic perspective, using indicators such as the income per head, the unemployment rate and the inflation rate. Little attention has been paid to the possibility of an associated convergence in ‘well-being’ across countries. Since recent literature has shown that subjective well-being (life satisfaction, ‘happiness’) is significantly affected by macroeconomic variables, it is natural to ask not only whether or not subjective well-being converges, but also, whether, how and to what extent this process is linked to macroeconomic convergence. In this paper we use self-rated life satisfaction elicited in large scale surveys to address these questions. We find evidence of convergence of life satisfaction across the member states of the EU, which can be attributed to a considerable extent to the convergence in macroeconomic conditions. Among the various macroeconomic indicators, the convergence in inflation rates has played a major role for the convergence in life satisfaction.

Heterogeneous Expectations, Learning and European Inflation Dynamics

This paper is the first attempt to investigate the performance of different learning rules in fitting survey data of household and expert inflation expectations in five core European economies (France, Germany, Italy, Netherlands and Spain). Overall it is found that constant gain learning performs well in out-of-sample forecasting. It is also shown that households in high inflation countries are using higher best fitting constant gain parameters than those in low inflation countries. They are hence able to pick up structural changes faster. Professional forecasters update their information sets more frequently than households. Furthermore, household expectations in the Euro Area have not converged to the inflation goal of the ECB, which is to keep inflation below to but close to 2% in the medium run. This contrasts the findings for professional experts, which seem to be more inclined to incorporate the implications of monetary union for the convergence in inflation rates into their expectations.

A re-examination of international inflation convergence over the modern float

Crowder [Crowder, W.J., 1996. The international convergence of inflation rates during fixed and floating exchange rate regimes. Journal of International Money and Finance 15, 551–576] provided evidence that inflation rates among the seven largest industrialized economies shared one common stochastic trend in the post-war era, over both the fixed and floating exchange rate regimes. The convergence of inflation rates over the floating exchange rate period implies less insulation for the domestic economy from idiosyncratic shocks in the rest of the world, thereby reducing the attractiveness of flexible exchange rates. Several subsequent studies have found much less convergence than suggested in Crowder's original results, suggesting a higher degree of insulation of flexible exchange rates. In this study, we revisit the question of the degree of inflation convergence among the G-7 nations over the modern float. Employing a host of diagnostic methods, we conclude that there is in fact one common trend underlying the inflation rates of the G-7 nations. Consistent with Crowder [Crowder, W.J., 1996. The international convergence of inflation rates during fixed and floating exchange rate regimes. Journal of International Money and Finance 15, 551–576], we cannot attribute the source of the underlying common trend to any one particular country.

Did the EMS encourage inflation convergence?

This paper studies the convergence of inflation rates over the period of 1983–93 for some countries within the European Monetary System. Three different price indices are considered for consumer goods, services, and industrial products. This study focuses on the difference between core and peripheral countries for measuring convergence speed. By using β- and σ-convergence tools, as previously identified in studies on output growth convergence, it was found that the convergence process did not evolve equally whether considered through price indices, time, or countries.

Mean reversion of inflation rates: Evidence from 13 OECD countries

The stationarity of inflation has several important economic implications. This paper applies two recently developed panel unit root tests to re-examine the stationarity of inflation rates in 13 OECD countries. We provide strong empirical evidence to support the mean reversion of inflation rates. Our finding fails to support the accelerationist hypothesis and it also points out that the conventional cointegration approach in analyzing the Fisher effect and the convergence of inflation rates may not be appropriate.

Instability in Cointegration Regressions: Evidence from Inflation Rate Convergence in EU Countries

We use cointegration tests that determine endogenously the regime shift to test for bilateral inflation rate convergence in the European Countries in the 1961-1997 period. When applying cointegration tests that do not allow for structural breaks, only for seven of the fourteen countries examined we find evidence of a long run relationship between their inflation rates and the German inflation rate. In contrast, our innovative approach provides strong evidence in favour of such relationship for all countries, except for Greece and Portugal.

The international convergence of inflation rates during fixed and floating exchange rate regimes

According to the assets approach to the balance of payments/exchange rate, under a fixed exchange rate regime, inflation must grow at the same rate in each of the participating countries, at least in the long run. The model implies that reserve currency inflation causes world inflation. The mechanism by which inflation is transmitted when currencies are allowed to float is more complex. The long run international convergence of inflation is studied using modern time series techniques on post-war data from the G-7 countries. The evidence on the convergence of inflation during the fixed regime portion of the sample is strong and consistent with the notion of reserve currency causality, i.e. from the US to the rest of the world. The evidence of convergence over the floating portion of the sample is also quite strong, but no single currency can be characterized as the common underlying source of world inflation implying the inflation rates are endogenous.

‘Can exchange rate predictability be achieved without monetary convergence?—evidence from the EMS’ by Kenneth Rogoff

The author shows that the EMS has contributed to stabilizing the exchange rates of member countries and attributes the stabilization to the implementation of capital controls. However this success becomes a failure as departing from market rules is a source of inefficiency. Therefore the EMS experience should be rejected as a lesson for an extended monetary coordination among countries with large capital markets. We concur broadly with the author's conclusions concerning the variability of exchange rates and interest rates but believe that his rejection of the EMS as a lesson on monetary coordination with a view to stabilizing exchange rates remains a moot point. In particular, the EMS experience has demonstrated that: a) large sterilized foreign exchange interventions in the presence of a risk premium have also contributed to stabilizing exchange rates together with capital controls; and b) this exchange rate arrangement has succeeded in fostering strong incentives towards policy coordination and convergence of inflation rates among some member countries.