A new look at economic convergence in Europe: a common factor approach

Abstract

A new look at economic convergence in Europe: a common factor approach This item was submitted to Loughborough University's Institutional Repository by the/an author. Additional Information:• This is a working paper. AbstractWe 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.JEL classification: C22, F31

Business Cycle Synchronization in Europe: Evidence from a Dynamic Factor Model

“…In the present paper, we will show that although evidence on European convergence in the runup to the EMU is consistent with popular findings in the existing literature (e.g., Altavilla, 2004;Darvas & Szapary, 2004;Massmann & Mitchell, 2004;Becker & Hall, 2009), there is scant evidence to support that synchronization in economic activity across European countries has continued to intensify since the inception of EMU.…”

“…1 Whether business cycles in the euro area have become more similar across its member states is a controversial issue. Numerous studies (e.g., Altavilla, 2004;Artis & Zhang, 1997, 1999Artis et al, 2004;Darvas & Szapary, 2004;Becker & Hall, 2009;Kose et al, 2008;Lumsdaine & Prasad, 2003;Mansour, 2003;Mumtaz et al, 2011;Monfort et al, 2003) find evidence of more synchronization in economic activity across core EU countries in the period of transition to the EMU, but the effect of national borders has remained remarkably strong. In line with Mundell's (1961) theory of optimal currency areas, Artis and Zhang (1997), and Frankel and Rose (1998) argue that business cycles among members of the Exchange Rate Mechanism -the predecessor of EMU -became more synchronized after pegging their exchange rates.…”

“…Because of the relatively short history of EMU, most empirical studies on European integration (e.g., Artis et al, 2004;Becker & Hall, 2009;Eckey et al, 2009;Hughes Hallett & Richter, 2006;Lumsdaine & Prasad, 2003;Mansour, 2003;Monfort et al, 2003) draw conclusions largely from data over pre-EMU periods. As asserted by Eichengreen (1991) and Gonçalves et al (2009), country experiences before adopting the euro may prove to be a misleading representation of what would have happened after 1999.…”

Banking market integration in the SADC countries: evidence from interest rate analyses

“…In the context of our analysis, a largely random factor loading (with variable signs and sizes) implies that the interest rates move largely independently of each other, hence indicating low integration. The more systematic (same sign and size) the loadings, the greater the degree of integration (Becker and Hall, 2007). In addition, the pattern exhibited by a group of countries can be used to determine a convergence group, i.e.…”

Inflation and business cycle convergence in the euro area: Empirical analysis using an unobserved component model

“…However, the above statement does not mean that sub-periods of divergence did not exist. In fact, Becker and Hall ( 2009) show that inflation co-movement was smaller after the creation of the euro than before. Such divergence can be identified in our approach, for each country, when the unobserved convergence variable, α t , is signif-icantly different from zero.…”