Convergence to Purchasing Power Parity at the Commencement of the Euro

We investigate convergence towards Purchasing Power Parity (PPP) within the Euro Zone and between the Euro Zone and its main partners using panel data methods. We find strong rejections of the unit root hypothesis, and therefore evidence of PPP, in the Euro Zone for different numeraire currencies, as well as in the Euro Zone plus the United States with the dollar as the numeraire currency, starting between 1996 and 1999. The process of convergence towards PPP, however, begins earlier, following the currency crises of 1992 and 1993, adoption of the Maastricht Treaty, and official completion of the Single Market. We are grateful to Menzie Chinn, Chris Murray, two anonymous referees, and to participants a