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Price convergence in the European Union and in the New Member States

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Author Info

  • Joanna Wolszczak-Derlacz

    () (Gdansk University of Technology, Faculty of Management and Economics, Gdańsk, Poland)

  • Rembert De Blander

    () (EcRu, Université catholique de Louvain and CES, Louvain-la-Neuve, Belgium)

Abstract

This paper examines price dispersion in the European Union (EU15) and in three New Member States (Poland, Hungary and the Czech Republic) between 1995 and 2006. The research is motivated by the fact that the price convergence problem is at the top of the public agenda in many New Member States (NMS). The analysis utilizes both disaggregate and aggregate price data, including the prices of 157 products and two indices constructed using two different weighting procedures. For each category of goods the price dispersion is lower in EU15 than EU15 plus 3 NMS. Sigma convergence measured as a decline in the standard deviation over time is rejected. Unit root tests reject the validity of the Law of One Price (LOOP) for most of the estimations of indices but confirm the LOOP for individual goods. The half-lives are shorter for NMS than for the EU15.

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Bibliographic Info

Article provided by National Bank of Poland, Economic Institute in its journal Bank i Kredyt.

Volume (Year): 40 (2009)
Issue (Month): 2 ()
Pages: 37-59

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Handle: RePEc:nbp:nbpbik:v:40:y:2009:i:2:p:37-59

Note: Joanna Wolszczak-Derlacz acknowledges financial support from the CERGE-EI Foundation under a program of the Global Development Network. The views expressed in the article do not necessarily represent those of CERGE-EI or the GDN.
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Related research

Keywords: price convergence; international price dispersion; law of one price;

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References

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  1. Mario J. Crucini & Mototsugu Shintani, 2006. "Persistence in Law-Of-One-Price Deviations: Evidence from Micro-Data," Vanderbilt University Department of Economics Working Papers 0616, Vanderbilt University Department of Economics.
  2. Parsley, David C & Wei, Shang-Jin, 1996. "Convergence to the Law of One Price without Trade Barriers or Currency Fluctuations," The Quarterly Journal of Economics, MIT Press, vol. 111(4), pages 1211-36, November.
  3. Christian Dreger & Konstantin Kholodilin & Kirsten Lommatzsch & Jiri Slacalek & Przemyslaw Wozniak, 2007. "Price Convergence in the Enlarged Internal Market," Discussion Papers of DIW Berlin 730, DIW Berlin, German Institute for Economic Research.
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  7. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
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  9. Rogers, John H., 2007. "Monetary union, price level convergence, and inflation: How close is Europe to the USA?," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 785-796, April.
  10. De Blander, Rembert & Dhaene, Geert, 2007. "Unit Root Tests for Panel Data with AR(1) Errors and Fixed T," Open Access publications from Katholieke Universiteit Leuven urn:hdl:123456789/161723, Katholieke Universiteit Leuven.
  11. Mario Crucini & Chris Telmer & Marios Zachariadis, 2003. "Price dispersion: The role of distance, borders and location," GSIA Working Papers 2004-E25, Carnegie Mellon University, Tepper School of Business.
  12. Martin Carree & Luuk Klomp, 1997. "Testing The Convergence Hypothesis: A Comment," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 683-686, November.
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Cited by:
  1. Leon Podkaminer, 2010. "Discrepancies between Purchasing Power Parities and Exchange Rates under the Law of One Price: A Puzzle (partly) Explained?," wiiw Working Papers 69, The Vienna Institute for International Economic Studies, wiiw.
  2. 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.

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