59. Eurozone Inflation Convergence: Deceptive Appearances

Pereira, F., & Aguiar-Conraria, L. (2025). Eurozone Inflation Convergence: Deceptive Appearances. Structural Change and Economic Dynamics, 74, 343–352. https://doi.org/10.1016/j.strueco.2025.03.018This paper investigates inflation convergence across the twelve founding Eurozone countries between 2001 and 2023, focusing on whether inflation cycles align sufficiently for the European Central Bank (ECB) to implement a unified monetary policy. Using wavelet-based methods, including the Wavelet Power Spectrum, cross-wavelet coherency, and distance matrices, the study examines Consumer Price Index inflation rates and Eurozone energy costs. Initial results indicate growing synchronization of inflation cycles after 2012, with country pairs such as Austria-Germany and France-Italy showing notable alignment. However, further analysis reveals that this convergence is largely driven by external energy shocks, particularly those following the Russia-Ukraine war in 2022, which sharply increased oil, gas, and electricity prices across all countries. Once energy effects are controlled for, most of the observed convergence disappears, suggesting that synchronization is temporary and exogenous rather than structural. The study concludes that inflation cycles remain heterogeneous, and genuine convergence within the Eurozone remains unproven.