Convergence European Monetary Union Exchange rates Nominal convergence Real convergence Principal components analysis
We propose a common factor approach to analyse convergence, which we implement using principal components analysis. We show that this method provides a useful new way of approaching the convergence debate. We apply this technique to a dataset of nominal and real monthly exchange rates of the twelve member countries of the European Monetary Union over the period 1970-2001. Our empirical results neatly capture the convergence patterns related to the various regimes from Bretton Woods toward EMU. The UK's Pound Sterling has been on a gradual convergence path to the Euro, although convergence is less progressed than it was for the EMU countries by 1999.
This is a working paper. It is also available at: http://ideas.repec.org/p/lbo/lbowps/2007_09.html.