The Euro Changeover and Its Effects on Price Transparency and Inflation
AbstractDespite 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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Bibliographic InfoArticle provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.
Volume (Year): 41 (2009)
Issue (Month): 1 (02)
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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879
Other versions of this item:
- Giovanni Mastrobuoni & Wioletta Dziuda, 2005. "The Euro Changeover and its Effects on Price Transparency and Inflation," Carlo Alberto Notebooks 26, Collegio Carlo Alberto, revised 2006.
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
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