Inflation rate dynamics convergence within the euro

Abstract

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