Premium
Euro Area Inflation Differentials: Unit Roots and Nonlinear Adjustment
Author(s) -
GREGORIOU ANDROS,
KONTONIKAS ALEXANDROS,
MONTAGNOLI ALBERTO
Publication year - 2011
Publication title -
jcms: journal of common market studies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.54
H-Index - 90
eISSN - 1468-5965
pISSN - 0021-9886
DOI - 10.1111/j.1468-5965.2010.02150.x
Subject(s) - inflation (cosmology) , economics , unit root , nonlinear system , divergence (linguistics) , econometrics , unit (ring theory) , mean reversion , empirical evidence , monetary policy , monetary economics , mathematics , linguistics , philosophy , physics , mathematics education , epistemology , quantum mechanics , theoretical physics
This article examines the time‐series properties of inflation differentials in 12 economic and monetary union (EMU) countries. The evidence from standard linear unit root tests indicates that inflation differentials are highly persistent in the majority of countries. However, when one allows for the possibility that inflation differentials can be characterized by a nonlinear mean reverting process, one finds evidence of stationarity in all cases. The empirical results suggest that once nonlinearity is accounted for, inflation differentials do not consistently intensify real divergence in the euro area.