Panel data evidence on inflation convergence in the European Union

Abstract

This letter investigates the extent of long-run inflation convergence among the major EU economies using panel data unit root and cointegration tests. Potentially, these methods have key advantages over time-series methods which, in the light of limited data, can suffer from power deficiency with a tendency to accept the null of nonstationarity or noncointegration. Using monthly inflation data over the period 1972–99, this study finds that inflation convergence was strongest during 1983–90 whereas the turbulence experienced within in the ERM in the early 1990s conferred some degree of macroeconomic independence among EU members.