Structural changes and deviations from the Purchasing Power Parity within the euro area

Abstract

This study focuses on macroeconomic convergence within the euro area over the period 1984–2002. The theoretical framework builds on the generalized purchasing power parity hypothesis, which is empirically tested using vector error correction models with broken deterministic components. The euro area turns out to be an integrated entity, even if national economies still exhibit a certain degree of heterogeneity. The results also suggest that up to now the ‘euro-effect’ in fostering integration within the euro area has been quite weak.