Inflation rate dynamics convergence within the Euro

Abstract

In this paper we use wavelet analysis to address the problem of inflation dynamics convergence in the Euro area. The study is conducted for the 11 countries that first joined the Euro. We use a dissimilarity measure derived in the time-frequency space to estimate the degree of inflation synchronization among these countries. With this measure, we fill a dissimilarity matrix which, with multidimensional scaling, is then used to plot the different countries in a plane. Our results indicate that the degree of inflation cycles synchronization is much stronger before than after the Euro. For example, while before the Euro, Portuguese inflation is synchronized with the inflation in six other countries, after the Euro adoption any statistical evidence of synchronization disappears. © 2014 Springer International Publishing.