Instability in Cointegration Regressions : Evidence from Inflation Rate Convergence in EU Countries

We use cointegration tests that determine endogenously the regime shift to test for bilateral inflation rate convergence in the European Countries in the 1961-1997 period. When applying cointegration tests that do not allow for structural breaks, only for seven of the fourteen countries examined we find evidence of a long run relationship between their inflation rates and the German inflation rate. In contrast, our innovative approach provides strong evidence in favour of such relationship for all countries, except for Greece and Portugal