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Limiting Currency Volatility to Stimulate Goods Market Integration: a Price-Based Approach

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Author Info
Parsley, David
Wei, Shang-Jin

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Abstract

This Paper empirically studies the effect of instrumental and institutional stabilization of the exchange rate on the integration of goods markets. An instrumental stabilization of the exchange rate is accomplished through intervention in the foreign exchange market, or by monetary policies. An institutional stabilization is an adoption of a currency board or a common currency. In contrast to the literature that employs data on the volume of trade, an important novelty of this Paper is the use of a 3-dimensional panel of prices of 95 very disaggregated goods (e.g., light bulbs) in 83 cities from around the world from 1990-2000. We find that goods market integration is increasing over time and is inversely related to distance, exchange rate variability, and tariff barriers. In addition, the impact of an institutional stabilization of the exchange rate provides a stimulus to goods market integration that goes far beyond an instrumental stabilization. Among the institutional arrangements, long-term currency unions demonstrate greater integration than more recent currency boards. All of them can improve their integration further relative to a US benchmark.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2958.

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Date of creation: Sep 2001
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Handle: RePEc:cpr:ceprdp:2958

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Related research
Keywords: currency union; dollarization; hard pegs; market integration;

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Find related papers by JEL classification:
F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

References listed on IDEAS
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Frankel, Jeffrey, 2003. "Experience of and Lessons from Exchange Rate Regimes in Emerging Economies," Working Paper Series rwp03-011, Harvard University, John F. Kennedy School of Government. [Downloadable!]
    Other versions:
  2. Nils Bjorksten & Anne-Marie Brook, 2002. "Exchange rate strategies for small open developed economies such as New Zealand," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 65, March. [Downloadable!]
  3. Romano, Donato, 2006. "Agriculture in the Age of Globalization," 2006 Annual Meeting, August 12-18, 2006, Queensland, Australia 25253, International Association of Agricultural Economists. [Downloadable!]
  4. Frankel, Jeffrey, 2004. "Real Convergence and Euro Adoption in Central and Eastern Europe: Trade and Business Cycle Correlations as Endogenous Criteria for Joining EMU," Working Paper Series rwp04-039, Harvard University, John F. Kennedy School of Government. [Downloadable!]
  5. James Yetman, 2003. "Currency Unions, Trade Flows, and Capital Flows," Working Papers 182003, Hong Kong Institute for Monetary Research. [Downloadable!]
    Other versions:
  6. Charles Engel, 2002. "Expenditure Switching and Exchange Rate Policy," NBER Working Papers 9016, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. Amar Gande & David Parsley, 2003. "News Spillovers in the Sovereign Debt Market," Working Papers 062003, Hong Kong Institute for Monetary Research. [Downloadable!]
    Other versions:
  8. Richard Friberg, 2003. "Common Currency, Common Market?," IEHAS Discussion Papers 0305, Institute of Economics, Hungarian Academy of Sciences. [Downloadable!]
    Other versions:
  9. Charles Engel, 2002. "The Responsiveness of Consumer Prices to Exchange Rates And the Implications for Exchange-Rate Policy: A Survey Of a Few Recent New Open-Economy..," NBER Working Papers 8725, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Richard E. Baldwin & Robert Anderton & Daria Taglioni, 2003. "The impact of monetary union on trade prices," Working Paper Series 238, European Central Bank. [Downloadable!]
    Other versions:
  11. Salvador Gil-Pareja & Simón Sosvilla-Rivero, . "Price Convergence in the European Car Market," Working Papers 2005-22, FEDEA. [Downloadable!]
    Other versions:
  12. Robertson, Raymond, 2004. "Defining North American Economic Integration," North American Agrifood Integration: Situation and Perspectives, May 2004, Cancun, Mexico 16732, Farm Foundation. [Downloadable!]
  13. Fischer, Christoph, 2009. "Price convergence in the EMU? Evidence from micro data," Discussion Paper Series 1: Economic Studies 2009,06, Deutsche Bundesbank, Research Centre. [Downloadable!]
  14. Philipp Maier, 2005. "A `Global Village' without borders? International price differentials at eBay," DNB Working Papers 044, Netherlands Central Bank, Research Department. [Downloadable!]
    Other versions:
  15. Matthias Lutz, 2003. "Price Convergence under EMU? First Estimates," University of St. Gallen Department of Economics working paper series 2003 2003-08, Department of Economics, University of St. Gallen. [Downloadable!]
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  16. Thomas Mathä, 2003. "What to Expect of the Euro? Analysing Price Differences of Individual Products in Luxembourg and its Surrounding Regions," ERSA conference papers ersa03p70, European Regional Science Association. [Downloadable!]
    Other versions:
  17. Guenter W. Beck, 2003. "Nominal Exchange Rate Regimes and Relative Price Dispersion: On the Importance of Nominal Exchange Rate Volatility for the Width of the Border," CFS Working Paper Series 2003/45, Center for Financial Studies. [Downloadable!]
  18. Andrén, Niclas & Oxelheim, Lars, 2006. "Producer Prices in the Transition to a Common Currency," Working Paper Series 668, Research Institute of Industrial Economics. [Downloadable!]
  19. Virgiliu Midrigan, 2005. "International Price Dispersion in State-Dependent Pricing Models," International Finance 0511001, EconWPA. [Downloadable!]
  20. Eduardo Borensztein & Paolo Mauro & Andrew Berg, 2002. "An Evaluation of Monetary Regime Options for Latin America," IMF Working Papers 02/211, International Monetary Fund. [Downloadable!]
    Other versions:
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