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The Euro Changeover and Its Effects on Price Transparency and Inflation

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Author Info
WIOLETTA DZIUDA
GIOVANNI MASTROBUONI

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Abstract

Despite the expectations of economists that the euro changeover would have no effect on prices, European consumers perceived the opposite. To shed some light on this puzzle, we develop a model of imperfect information in which cheaper goods experience higher price growth after the changeover. Retailers, aware of consumers' difficulties in adopting the new currency, use currency changeovers to increase profits by increasing prices. The lower the price transparency after the changeover, the higher the euro-related inflation. Using data on inflation (Eurostat) and price levels (Economist Intelligence Unit), we show that although the euro changeover did not significantly increase inflation, it nevertheless had a distortionary effect on prices. After the changeover, cheaper goods had higher inflation, and this effect was stronger in countries in which people found dealing with the new currency problematic. Copyright (c) 2009 The Ohio State University.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1538-4616.2008.00189.x
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Publisher Info
Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 41 (2009)
Issue (Month): 1 (02)
Pages: 101-129
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Handle: RePEc:mcb:jmoncb:v:41:y:2009:i:1:p:101-129

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Giancarlo Marini & Fabrizio Adriani & Pasquale Scaramozzino, 2003. "The Inflationary Consequences of a Currency Changeover: Evidence from the Michelin Red Guide," CEIS Research Paper 27, Tor Vergata University, CEIS. [Downloadable!]
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  2. Steven Salop & Joseph Stiglitz, 1977. "Bargains and ripoffs: a model of monopolistically competitive price dispersion," Special Studies Papers 94, Board of Governors of the Federal Reserve System (U.S.).
    Other versions:
  3. Paolo Angelini & Francesco Lippi, 2006. "Did inflation really soar after the euro cash changeover? Indirect evidence from ATM withdrawals," Temi di discussione (Economic working papers) 581, Bank of Italy, Economic Research Department. [Downloadable!]
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  4. Marco G. Ercolani and Jayasri Dutta, 2006. "The Euro-changeoverand Euro-inflation: Evidence from Eurostat's HICP," Discussion Papers 06-03, Department of Economics, University of Birmingham. [Downloadable!]
  5. Luc Aucremann & David Cornille, 2001. "Attractive prices and euro-rounding effects on inflation," Documents series 200111, National Bank of Belgium. [Downloadable!]
  6. Aucremanne, L. & Cornille, D., 2001. "Attractive Prices and Euro-Rounding Effects on Inflation," Papers 17, Warwick - Development Economics Research Centre.
  7. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June. [Downloadable!] (restricted)
  8. Eugenio Gaiotti & Francesco Lippi, 2005. "Pricing behavior and the introduction of the euro: evidence from a panel of restaurants," Macroeconomics 0501029, EconWPA, revised 15 Feb 2005. [Downloadable!]
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jan Marc Berk & Gerbert Hebbink, 2006. "The anchoring of European inflation expectations," DNB Working Papers 116, Netherlands Central Bank, Research Department. [Downloadable!]
  2. Arturo Bris & Augusto Rupérez-Micola, 2008. "Separated by a Common Currency? Evidence from the Euro Changeover," Economics Working Papers 1086, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
  3. Daron Acemoglu & Davide Ticchi & Andrea Vindigni, 2008. "A Theory of Military Dictatorships," Carlo Alberto Notebooks 74, Collegio Carlo Alberto. [Downloadable!]
    Other versions:
  4. Daron Acemoglu & Victor Chernozhukov & Muhamet Yildiz, 2007. "Learning and Disagreement in an Uncertain World," Carlo Alberto Notebooks 48, Collegio Carlo Alberto. [Downloadable!]
    Other versions:
  5. Thomas A. Eife & W. Timothy Coombs, 2007. "Coping with People's Inflation Perceptions during a Currency Changeover," Working Papers 0458, University of Heidelberg, Department of Economics, revised Nov 2007. [Downloadable!]
    Other versions:
  6. Paolo Ghirardato & Fabio Maccheroni & Massimo Marinacci, 2007. "Revealed Ambiguity and Its Consequences: Updating," Carlo Alberto Notebooks 44, Collegio Carlo Alberto. [Downloadable!]
  7. Thomas Maag, 2009. "On the Accuracy of the Probability Method for Quantifying Beliefs about Inflation," KOF Working papers 09-230, KOF Swiss Economic Institute, ETH Zurich. [Downloadable!]
  8. Fabrizio Adriani & Giancarlo Marini & Pasquale Scaramozzino, 2008. "The Inflationary Consequences of a Currency Changeover on the Catering Sector: Evidence from the Michelin Red Guide," Bristol Economics Discussion Papers 08/604, Department of Economics, University of Bristol, UK. [Downloadable!]
    Other versions:
  9. Parsley, David & Wei, Shang-jin, 2007. "In Search of a Euro Effect: Big Lessons from a Big Mac Meal?," MPRA Paper 6041, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  10. Esteban Jaimovich, 2007. "Sectoral Differentiation, Allocation of Talent, and Financial Development," Carlo Alberto Notebooks 59, Collegio Carlo Alberto, revised 2009. [Downloadable!]
  11. Paolo Angelini & Francesco Lippi, 2007. "Did Prices Really Soar after the Euro Cash Changeover? Evidence from ATM Withdrawals," International Journal of Central Banking, International Journal of Central Banking, vol. 3(4), pages 1-22, December. [Downloadable!]
  12. Sarah M. Lein & Thomas Maag, 2008. "The Formation of Inflation Perceptions – Some Empirical Facts for European Countries," KOF Working papers 08-204, KOF Swiss Economic Institute, ETH Zurich. [Downloadable!]
  13. Itzhak Gilboa & Fabio Maccheroni & Massimo Marinacci & David Schmeidler, 2008. "Objective and Subjective Rationality in a Multiple Prior Model," Carlo Alberto Notebooks 73, Collegio Carlo Alberto, revised 2008. [Downloadable!]
  14. Elisa Luciano & Elena Vigna, 2006. "Non mean reverting affne processes for stochastic mortality," Carlo Alberto Notebooks 30, Collegio Carlo Alberto. [Downloadable!]
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  15. Stephen G. Cecchetti & Kermit L. Schoenholtz, 2008. "How Central Bankers See It: The First Decade of ECB Policy and Beyond," NBER Working Papers 14489, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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