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One Market, One Money, One Price?

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  • Nigel F.B. Allington

    (Gonville and Caius College, University of Cambridge, and Cardiff University)

  • Paul A. Kattuman

    (Judge Business School and Corpus Christi College, University of Cambridge)

  • Florian A. Waldmann

    (Citigroup Global Markets, London and Wolfson College, University of Cambridge)

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    Abstract

    The introduction of the euro was intended to integrate markets within Europe further, after the implementation of the 1992 Single Market Project. We examine the extent to which this objective has been achieved, by examining the degree of price dispersion between countries in the euro zone, compared to a control group of EU countries outside the euro zone. We also establish the role of exchange rate risk in hampering arbitrage by estimating the euro effect for subgroups within the euro zone, utilizing differences among EU countries in participation in the Exchange Rate Mechanism. Our results, in contrast with previous empirical research, suggest robustly that the euro has had a significant integrating effect.

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    Bibliographic Info

    Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

    Volume (Year): 1 (2005)
    Issue (Month): 3 (December)
    Pages:

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    Handle: RePEc:ijc:ijcjou:y:2005:q:4:a:3

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    Web page: http://www.ijcb.org/

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    References

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    1. Simón Sosvilla-Rivero & Salvador Gil-Pareja, . "Price Convergence in the European Union," Working Papers 2002-12, FEDEA.
    2. Jonathan Haskel & Holger Wolf, 2001. "The Law of One Price - A Case Study," NBER Working Papers 8112, National Bureau of Economic Research, Inc.
    3. Charles Engel & John H. Rogers, 1995. "How wide is the border?," International Finance Discussion Papers 498, Board of Governors of the Federal Reserve System (U.S.).
    4. Parsley, David & Wei, Shang-Jin, 2001. "Limiting Currency Volatility to Stimulate Goods Market Integration: a Price-Based Approach," CEPR Discussion Papers 2958, C.E.P.R. Discussion Papers.
    5. Lutz, Matthias, 2003. "Price Convergence under EMU? First Estimates," Royal Economic Society Annual Conference 2003 143, Royal Economic Society.
    6. Ernst Fehr & Jean-Robert Tyran, 2000. "Does Money Illusion Matter?," IEW - Working Papers 045, Institute for Empirical Research in Economics - University of Zurich.
    7. Philip R. Lane, & Patrick Honohan, 2003. "Divergent Inflation Rates in EMU," The Institute for International Integration Studies Discussion Paper Series iiisdp05, IIIS.
    8. Marianne Bertrand & Esther Duflo & Sendhil Mullainathan, 2002. "How Much Should We Trust Differences-in-Differences Estimates?," NBER Working Papers 8841, National Bureau of Economic Research, Inc.
    9. Alejandro Micco & Ernesto H. Stein & Guillermo Luis Ordoñez, 2003. "The Currency Union Effect on Trade: Early Evidence from EMU," IDB Publications 6511, Inter-American Development Bank.
    10. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
    11. Richard B. Freeman, 1995. "Are Your Wages Set in Beijing?," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 15-32, Summer.
    12. Pinelopi K. Goldberg & Frank Verboven, 2001. "Market Integration and Convergence to the Law of One Price: Evidence from the European Car Market," NBER Working Papers 8402, National Bureau of Economic Research, Inc.
    13. Maria ELEFTHERIOU, 2003. "On the Robustness of the "Taylor Rule" in the EMU," Economics Working Papers ECO2003/17, European University Institute.
    14. David C. Parsley & Shang-Jin Wei, 1996. "Convergence to the Law of One Price Without Trade Barriers or Currency Fluctuations," NBER Working Papers 5654, National Bureau of Economic Research, Inc.
    15. John H. Rogers, 2001. "Price level convergence, relative prices, and inflation in Europe," International Finance Discussion Papers 699, Board of Governors of the Federal Reserve System (U.S.).
    16. Andrew K. Rose, 2000. "One money, one market: the effect of common currencies on trade," Economic Policy, CEPR & CES & MSH, vol. 15(30), pages 7-46, 04.
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    Cited by:
    1. Isabelle Méjean & Cyrille Schwellnus, 2009. "Price Convergence in the European Union: Within Firms or Composition of Firms?," Working Papers hal-00354190, HAL.
    2. Fischer, Christoph, 2012. "Price convergence in the EMU? Evidence from micro data," European Economic Review, Elsevier, vol. 56(4), pages 757-776.
    3. Jiří Schwarz, 2012. "Impact of institutions on cross-border price dispersion," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 148(4), pages 617-645, December.
    4. Carin van der Cruijsen & Maria Demertzis, 2009. "How Anchored Are Inflation Expectations in EMU Countries?," DNB Working Papers 235, Netherlands Central Bank, Research Department.
    5. Becker, Sascha & Nautz, Dieter, 2010. "Inflation, price dispersion and market integration through the lens of a monetary search model," Discussion Papers 2010/2, Free University Berlin, School of Business & Economics.
    6. Michael R. Baye & J. Rupert J. Gatti & Paul Kattuman & John Morgan, 2006. "Did the Euro Foster Online Price Competition? Evidence from an International Price Comparison Site," Economic Inquiry, Western Economic Association International, vol. 44(2), pages 265-279, April.
    7. Oliver Holtemöller & Götz Zeddies, 2013. "Has the Euro increased international price elasticities?," Empirica, Springer, vol. 40(1), pages 197-214, February.
    8. Christian Dreger & Konstantin Kholodilin & Kirsten Lommatzsch & Jirka Slacalek & Przemyslaw Wozniak, 2007. "Price Convergence in the Enlarged Internal Market," CASE Network Reports 0076, CASE-Center for Social and Economic Research.
    9. Sascha S. Becker, 2011. "What Drives the Relationship Between Inflation and Price Dispersion? Market Power vs. Price Rigidity," SFB 649 Discussion Papers SFB649DP2011-019, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    10. David Guerreiro & Valérie Mignon, 2011. "On price convergence in Eurozone," EconomiX Working Papers 2011-34, University of Paris West - Nanterre la Défense, EconomiX.
    11. Václav Žďárek, 2011. "An Empirical Analysis of Price Convergence of the Czech Republic and the New EU Member States towards the Euro Area," Politická ekonomie, University of Economics, Prague, vol. 2011(4), pages 454-474.
    12. Jan-Egbert Sturm & Ulrich Fritsche & Michael Graff & Michael Lamla & Sarah Lein & Volker Nitsch & David Liechti & Daniel Triet, 2009. "The euro and prices: changeover-related inflation and price convergence in the euro area," European Economy - Economic Papers 381, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.

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