COMMON STOCHASTIC TRENDS AND INFLATION CONVERGENCE IN THE EMS

This article seeks to clarify the relationship between the concept of convergence and univariate and cointegration analysis by looking at in flation convergence within the EMS. We take issue with the view put fo rward by Artis and Nachane, who hold that cointegration of inflation i n Germany with inflation in the other EMS countries is a necessary con dition for the ''german leadership'' thesis to stand. We think that, o n the contrary, as long as convergence is still in the process of bein g achieved, inflation differentials are likely to be non-stationary an d, if so, to exhibit common stochastic trends. However, our empirical results, based on Phillips-Perron tests and on the maximum likelihood framework developed by Johansen to test for common trends and cointegr ation, confirm the validity of the German leadership hypothesis,