Testing for Group-Wise Convergence with an Application to Euro
University of Cincinnati
David H. Papell
University of Houston
We propose a new procedure to increase the power of panel unit root tests when used to study group-
wise convergence. When testing for stationarity of the differential between a group of series and their
cross-sectional means, although each differential has non-zero mean, the group of differentials has a
cross-sectional average of zero for each time period by construction. We incorporate this constraint for
estimation and generating finite sample critical values. Applying this new procedure to Euro Area
inflation, we find strong evidence of convergence among the inflation rates soon after the
implementation of the Maastricht treaty and a dramatic decrease in the persistence of the differential
after the occurrence of the single currency.
We thank Paul Evans, Chris Murray, and participants at the Midwest Econometric Group, Purdue University,
Sam Houston State University, Southern Economic Association and Society for Nonlinear Dynamics and
Econometrics meetings for helpful comments and discussions. Lopez would like to acknowledge the financial
support of the Taft Research Center.
Department of Economics, University of Cincinnati, Cincinnati, OH 45221-0371 Tel: +1 (513) 556-2346.
Department of Economics, University of Houston, Houston, TX 77204-5882 Tel: +1 (713) 743-3807. Email:
Time series investigation of the convergence hypothesis often relies on unit root tests.
The rejection of the null hypothesis is commonly interpreted as evidence that the series have
converged to their equilibrium state, since any shock that causes deviations from the
equilibrium eventually dies out. The extension of these tests to the panel framework has
significantly influenced the literat