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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

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.

Suggested Citation

  • Thomas Mathä, 2003. "What to expect of the euro? Analysing price differences of individual products in Luxembourg and its surrounding regions," BCL working papers 8, Central Bank of Luxembourg.
    • Handle: RePEc:bcl:bclwop:bclwp008
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    Cited by:

    1. Christian Dreger & Konstantin Kholodilin & Kirsten Lommatzsch & JiÅí SlaÄálek & Przemyslaw Wozniak, 2008. "Price Convergence in an Enlarged Internal Market," Eastern European Economics, Taylor & Francis Journals, vol. 46(5), pages 57-68, September.
    2. Matthias Lutz, 2004. "Price Convergence under EMU? First Estimates," International Economic Association Series, in: Alan V. Deardorff (ed.), The Past, Present and Future of the European Union, chapter 4, pages 48-73, Palgrave Macmillan.
    3. Nigel F.B. Allington & Paul A. Kattuman & Florian A. Waldmann, 2005. "One Market, One Money, One Price?," International Journal of Central Banking, International Journal of Central Banking, vol. 1(3), December.
    4. Allington, Nigel FB & Kattuman, Paul A & Waldmann, Florian A, 2005. "One Market, One Money, One Price?," MPRA Paper 835, University Library of Munich, Germany.
    5. Salvador Gil-Pareja & Simon Sosvilla-Rivero, 2007. "Price convergence in the European car market," Applied Economics, Taylor & Francis Journals, vol. 40(2), pages 241-250.
    6. 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 2008 - 2015 381, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    7. 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.

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    More about this item

    Keywords

    Euro; Price Dispersion; Price Convergence; Law of One Price;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes

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