Testing for Inflation Convergence among European Union Countries: A Panel Approach.

Abstract

One of the principal economic challenges in the European Union is entering the euro area by the candidate countries. The aim of this study is twofold. First, based mainly on the theoretical framework about the economic integration in Europe, issues related to this process are presented. Furthermore, the importance of the Maastricht convergence criteria is discussed, as nominal convergence criteria are underlined in connection to successful catching up. Broadly speaking, in order for any EUC to join the Euro area, it is important for them to satisfy these pre-accession criteria. It is obvious from the beginning that the Euro area would need far more convergence than other currency unions. In order to be stable, the Euro area needs price stability in the form of small inflation differentials. In the light of the achievement of small inflation differentials, this thesis also tries to empirically identify whether inflation convergence exists in a sample of twenty-four European Union countries. To tackle this issue, first and second generation panel unit root and stationarity tests are employed so as to provide evidence of inflation convergence before and after the launch of the single currency, the euro. The methodology of the influential studies by Spiru (2008) and Gregoriou et al. (2011) is used. In general, the findings reveal that conditional inflation convergence exists for all panels under study.