Does European Monetary Union make inflation dynamics more uniform?

Abstract

Using a non-parametric method to characterize Markovian operators, we describe the evolution of the short-run inflation processes among the EMU countries between 1996 and 2012. While a progressive clustering pattern can be outlined in the first half of the period – showing that the monetary union makes price dynamics more homogeneous – starting from 2004, an increase in price volatility makes the clustering pattern unstable, as the analysis of the changing points of the inflation processes confirms.

Keywords:

• inflation dynamics
• EMU
• Markov process
• cluster analysis

JEL Classification:

• C22
• C38
• E31

Notes

¹ Notice that depends on the transition density from to , so we put explicitly the dependence on in the notation.

² See http://sdw.ecb.europa.eu/browse.do?node=9138811. Data are seasonally adjusted.

³ The two countries entreed the EU in 2004. Slovenia adopted the Euro in 2007 and Slovakia in 2009.

⁴ Italy is a sort of singleton in Busetti et al. (2007), while it is included in the Southern countries cluster in our analysis.

⁵ The coefficients and are supposed to be unknown and estimated non-parametrically as in De Gregorio and Iacus (2010).

⁶ See Eickmeier and Breitung (2006) for a comparison.