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What to expect of the euro? Analysing price differences of individual products in Luxembourg and its surrounding regions

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  • Thomas Mathä

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Abstract

This paper uses individual supermarket prices and analyses to what extent absolute deviations from the law of one price are attributable to transaction costs. The results indicate that absolute percentage price differences are increasing in distance, but at a decreasing rate. Similarly, crossing borders increases price deviations, while being inside the former Belgian-Luxembourg monetary association has the opposite effect. This result nurtures the hopes that the euro may be able to reduce regional and cross-border price differences in the long term. Furthermore, larger differences in packaging sizes result in larger price deviations, while the opposite is the case for prices observed within the same retail group.

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File URL: http://www.bcl.lu/fr/publications/cahiers_etudes/8/BCLWP008.pdf
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Bibliographic Info

Paper provided by Central Bank of Luxembourg in its series BCL working papers with number 8.

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Length: 27 pages
Date of creation: Apr 2003
Date of revision:
Publication status: published as The Euro and Price Differences of Individual Products in an Integrated Cross-Border Area, in Journal of Common Market Studies, 2006, 44(3): 563-580.
Handle: RePEc:bcl:bclwop:bclwp008

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Web page: http://www.bcl.lu/

Related research

Keywords: Euro; Price Dispersion; Price Convergence; Law of One Price;

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References

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  15. Shang-Jin Wei & David C. Parsley, 1995. "Purchasing Power Disparity During the Floating Rate Period: Exchange Rate Volatility, Trade Barriers and Other Culprits," NBER Working Papers 5032, National Bureau of Economic Research, Inc.
  16. 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.
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  19. Marcus Asplund & Richard Friberg, 2001. "The Law of One Price in Scandinavian Duty-Free Stores," American Economic Review, American Economic Association, vol. 91(4), pages 1072-1083, September.
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Cited by:
  1. 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.
  2. Jan-Egbert Sturm & Ulrich Fritsche & Michael Graff & Michael Lamla & Sarah Lein & Volker Nitsch & David Liechti & Daniel Triet, 2009. "The euro and prices: changeover-related inflation and price convergence in the euro area," European Economy - Economic Papers 381, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.

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