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A New Look at Economic Convergence in Europe: A Common Factor Approach

Author

Listed:
  • Bettina Becker

    (Department of Economics, Loughborough University)

  • Stephen G. Hall

    (Department of Economics, University of Leicester)

Abstract

We propose a common factor approach to analyse convergence, which we implement using principal components analysis. We show that this method provides a useful new way of approaching the convergence debate. We apply this technique to a dataset of nominal and real monthly exchange rates of the twelve member countries of the European Monetary Union over the period 1970-2001. Our empirical results neatly capture the convergence patterns related to the various regimes from Bretton Woods toward EMU. The UK's Pound Sterling has been on a gradual convergence path to the Euro, although convergence is less progressed than it was for the EMU countries by 1999.

Suggested Citation

  • Bettina Becker & Stephen G. Hall, 2007. "A New Look at Economic Convergence in Europe: A Common Factor Approach," Discussion Paper Series 2007_09, Department of Economics, Loughborough University, revised Feb 2007.
    • Handle: RePEc:lbo:lbowps:2007_09
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    File URL: http://www.lboro.ac.uk/departments/ec/RePEc/lbo/lbowps/Becker_Hall.pdf
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    References listed on IDEAS

    as
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    8. Mario Forni & Lucrezia Reichlin, 1998. "Let's Get Real: A Factor Analytical Approach to Disaggregated Business Cycle Dynamics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 65(3), pages 453-473.
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    Cited by:

    1. M. J. Aziakpono & S. Kleimeier & H. Sander, 2012. "Banking market integration in the SADC countries: evidence from interest rate analyses," Applied Economics, Taylor & Francis Journals, vol. 44(29), pages 3857-3876, October.
    2. B Harrison & W Moore, 2010. "Stock Market Co-Movement in the Caribbean," Economic Issues Journal Articles, Economic Issues, vol. 15(1), pages 1-15, March.
    3. Jana Riedel, 2020. "On real interest rate convergence among G7 countries," Empirical Economics, Springer, vol. 59(2), pages 599-626, August.
    4. Becker, Bettina & Hall, Stephen G., 2009. "How far from the Euro Area? Measuring convergence of inflation rates in Eastern Europe," Economic Modelling, Elsevier, vol. 26(4), pages 788-798, July.
    5. Stephen Hall & Sérgio Lagoa, 2014. "Inflation and Business Cycle Convergence in the Euro Area: Empirical Analysis Using an Unobserved Component Model," Open Economies Review, Springer, vol. 25(5), pages 885-908, November.

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    More about this item

    Keywords

    Convergence; exchange rates; European Monetary Union; nominal convergence; real convergence; principal components analysis.;
    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
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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