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Euro Area Inflation Differentials: Unit Roots, Structural Breaks and Non-Linear Adjustment

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  • Alberto Montagnoli
  • Andros Gregoriou
  • Alexandros Kontonikas

Abstract

This paper examines the time series properties of inflation differentials in twelve EMU countries. We compute three alternative measures of inflation differentials using deviations from the policy reference value implied by the Maastricht Treaty, the ECB target, and deviations from the EMU average inflation. The evidence from standard linear unit root tests indicate that inflation differentials are highly persistent. However, when we account for endogenously determined structural breaks, we obtain greater support for stationarity. In addition, when we allow for the possibility that inflation differentials can be charterised by a non-linear mean reverting process we find evidence of stationarity. Our empirical results suggest that once we allow for structural breaks or non-linearities, inflation differentials do not consistently intensify real divergence in the euro area

Suggested Citation

  • Alberto Montagnoli & Andros Gregoriou & Alexandros Kontonikas, 2007. "Euro Area Inflation Differentials: Unit Roots, Structural Breaks and Non-Linear Adjustment," Working Papers 2007_13, Business School - Economics, University of Glasgow.
    • Handle: RePEc:gla:glaewp:2007_13
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    References listed on IDEAS

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    2. Giorgio Canarella & Stephen Miller & Stephen Pollard, 2011. "The Global Financial Crisis and Stochastic Convergence in the Euro Area," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 17(3), pages 315-333, August.
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    More about this item

    Keywords

    EMU; ESTAR models; Inflation; Structural break; Unit root tests;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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