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Common Currency, Common Market?

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  • Richard Friberg

    (Stockholm School of Economics,)

Abstract

Does the common currency promote goods market integration within the EMU? We argue that such an effect is likely, but that the mechanism typically proposed-lower costs of arbitrage because of increased price transparency-is likely to be of minor importance. Instead we sketch a duopoly model which stresses that lower possibility of future real exchange rate variability lowers the option value of being able to price discriminate. The euro would promote market integration because it is less valuable for firms to segment markets. In addition we argue that fairness concerns and less risk associated with third party arbitrage may be potentially important. (JEL: F13, F15, F41, L40) Copyright (c) 2003 The European Economic Association.

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Bibliographic Info

Article provided by MIT Press in its journal Journal of the European Economic Association.

Volume (Year): 1 (2003)
Issue (Month): 2-3 (04/05)
Pages: 650-661

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Handle: RePEc:tpr:jeurec:v:1:y:2003:i:2-3:p:650-661

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References

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  12. Haskel, Jonathan & Wolf, Holger, 2001. " The Law of One Price--A Case Study," Scandinavian Journal of Economics, Wiley Blackwell, vol. 103(4), pages 545-58, December.
  13. David C. Parsley & Shang-Jin Wei, 2001. "Limiting Currency Volatility to Stimulate Goods Market Integration: A Price Based Approach," NBER Working Papers 8468, National Bureau of Economic Research, Inc.
  14. Friberg, Richard, 2000. "Two monies, two markets? Variability and the option to segment," Working Paper Series in Economics and Finance 349, Stockholm School of Economics.
  15. Taylor, Alan M, 2001. "Potential Pitfalls for the Purchasing-Power-Parity Puzzle? Sampling and Specification Biases in Mean-Reversion Tests of the Law of One Price," Econometrica, Econometric Society, vol. 69(2), pages 473-98, March.
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Citations

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Cited by:
  1. Catherine Gendron-Saulnier & Marc Santugini, 2013. "When (Not) to Segment Markets," Cahiers de recherche 1335, CIRPEE.
  2. Philipp Maier, 2005. "A `Global Village' without borders? International price differentials at eBay," DNB Working Papers 044, Netherlands Central Bank, Research Department.
  3. Witte, Mark David, 2009. "The currency denomination of external European Union imports after European Union expansion," Economic Systems, Elsevier, vol. 33(3), pages 245-258, September.
  4. Friberg, Richard & Matha, Thomas Y., 2004. "Does a common currency lead to (more) price equalization? The role of psychological pricing points," Economics Letters, Elsevier, vol. 84(2), pages 281-287, August.
  5. Thomas Mathä, 2005. "Der Euro und Weiterführende Regionale Preiskonvergenz? Resultate aus der 'Gro�-Region' um Luxemburg," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 6(1), pages 57-70, 02.
  6. Marina Glushenkova & Marios Zachariadis, 2014. "Understanding Law-of-One-Price Deviations across Europe Before and After the Euro," University of Cyprus Working Papers in Economics 01-2014, University of Cyprus Department of Economics.

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