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A Short History of Price Level Convergence in Europe

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  • RIEMER P. FABER
  • AD C. J. STOKMAN

Abstract

We study the evolution of price level dispersion in Europe by combining time‐series information on harmonized indices of consumer prices (HICPs) with occasional observations of absolute price levels. We find that European price levels converged over much of the last 40 to 50 years. In the United States, our benchmark, price level dispersion is more or less stable. A back‐of‐the‐envelope calculation suggests that indirect tax rate harmonization, convergence of nontraded input costs, and convergence of traded input costs (in the form of exchange rate stability and increased openness) are all important in explaining European price level convergence.

Suggested Citation

  • Riemer P. Faber & Ad C. J. Stokman, 2009. "A Short History of Price Level Convergence in Europe," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(2‐3), pages 461-477, March.
    • Handle: RePEc:wly:jmoncb:v:41:y:2009:i:2-3:p:461-477
    DOI: 10.1111/j.1538-4616.2009.00215.x
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    3. Maurer, Rainer, 2022. "Price levels in the European Monetary Union: Even tradables follow independent random walks," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 81(C).
    4. Luca Macedoni, 2021. "Has the Euro Shrunk the Band? Relative Purchasing Power Parity Convergence in a Currency Union," Scandinavian Journal of Economics, Wiley Blackwell, vol. 123(2), pages 593-620, April.

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