Pilgrims to the Eurozone: how far, how fast?

Abstract

In our analysis, we re-examine the nominal and real convergence of all recent 10 European Union (EU) members to EU standards. Testing for monetary convergence has significant implications for interim optimal exchange rate and monetary policies before a formal and permanent link to the euro, while real convergence is the ultimate objective of economic integration. Novel features of the paper include broader measures of real convergence in both euro as well as local currencies, an examination of inflation and interest rate convergence with respect to the Maastricht benchmarks, and employment of more appropriate tests of convergence allowing for structural breaks. The results indicate slow but steady per-capita real income convergence towards EU standards. On the other hand, evidence indicates significant strong inflation and interest rate convergence. Policy implications of the paper are also discussed. © 2006 Elsevier B.V. All rights reserved.