An Empirical Analysis of Price Convergence of the Czech Republic and the New EU Member States towards the Euro Area

The main goal of this paper is to analyse the process of price convergence (beta and sigma convergence) in new EU Member States towards the Euro area (EU-12). The theoretical part of the paper consists of a brief overview of methods that are employed for analyses of the process of price convergence. Both main concepts - sigma and beta convergence are covered including various tests that are described in greater detail. The empirical part of the paper is focused on testing hypotheses of sigma and beta convergence using macroeconomic data (comparative price levels for GDP) for twelve new EU Member States in the period 1995-2008. Various econometrical methods (OLS, 2SLS, and two dynamic methods) are utilised in order to deal with problems associated with this particular type of analyses. Our results show that both hypotheses (sigma and beta price convergence) do hold for the new EU Member States. The estimated time to close a half of the remaining gap of comparative price levels towards the Euro area average for the group consisting of all new EU Member States (NMS12) is estimated to be approximately 9.6 years, for the group of more advanced countries (NMS5) is approximately 7.1 years.