Do Prices in the EMU Converge (Non-linearly)?§

This paper examines the current state of price convergence amongst the eleven initial EMUmember states. Special attention is given to pos-sible changes in the convergence process during the euro cash change-over. We apply the σ-convergence approach using both panel esti-mates of changes in the deterministic time trend of a coefficient of variation and stochastic kernel-density estimates. We find that con-vergence took place before 2000, slowed down substantially between 2000 and 2003, and resurfaced after 2003. This points to a non-linear convergence path. We show that stronger convergence is associated with periods of positive and less-dispersed output gaps across member states. There are no big differences between the results for tradables and non-tradables, indicating that Balassa-Samuelson effects are rela-tively weak