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Price dispersion in Europe: Does the business cycle matter?

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Author Info

  • Marco Hoeberichts
  • Ad Stokman

Abstract

We analyze the effect of the business cycle on price dispersion in Europe . Five decades of price level dispersion data for Europe enable us to distinguish short-term influences from long-term influences like market integration. We find that at the business cycle frequency, price dispersion across EMU member countries over the 1960 - 2009 period is significantly lower during economic downturns. This confirms on a macroeconomic level the evidence from micro and survey studies that markets become more competitive with falling demand, reducing deviations from the Law of One Price. Our model replicates most of the major drops in price level dispersion during severe economic recessions of the early 1970s, 1980s and 1990s, as well as the small change during the recent financial crisis.

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File URL: http://www.dnb.nl/en/binaries/working%20paper%20285_tcm47-252979.pdf
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Bibliographic Info

Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 285.

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Date of creation: Mar 2011
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Handle: RePEc:dnb:dnbwpp:285

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Related research

Keywords: economic integration; price level convergence; Law of One Price; EMU; business cycle;

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Cited by:
  1. 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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