Convergence and Cycles in the Euro Zone
38 Pages Posted: 24 Jan 2005
Date Written: November 2004
Abstract
Multivariate unobserved components (structural) time series models are fitted to annual post-war observations on real income per capita in countries in the euro zone. The aim is to establish stylized facts about convergence as it relates both to long-run income levels and to cycles. The analysis is based on a new model in which convergence components are combined with a common trend and similar cycles. These convergence components are formulated as a second-order error correction mechanism that ensures that the extracted components change smoothly, thereby giving a clearer decomposition into long-run movements and cycles.
Keywords: Balanced growth, error correction mechanism, Kalman filter, signal extraction, stochastic trend, unobserved components
JEL Classification: C32, O40
Suggested Citation: Suggested Citation
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