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Separated by a common currency? Evidence from the Euro changeover

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  • Arturo Bris
  • Augusto Rupérez-Micola
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    Abstract

    We study the price convergence of goods and services in the euro area in 2001-2002. To measure the degree of convergence, we compare the prices of around 220 items in 32 European cities. The width of the border is the price di¤erence attributed to the fact that the two cities are in different countries. We find that the 2001 European borders are negative, which suggests that the markets were very integrated before the euro changeover. Moreover, we do not identify an integration effect attributable to the introduction of the euro. We then explore the determinants of the European borders. We find that different languages, wealth and population differences tend to split the markets. Historical inflation, though, tends to lead to price convergence.

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    Bibliographic Info

    Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 1086.

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    Date of creation: Mar 2008
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    Handle: RePEc:upf:upfgen:1086

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    Web page: http://www.econ.upf.edu/

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    Keywords: Euro; economic integration;

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    1. Giovanni Mastrobuoni & Wioletta Dziuda, 2005. "The Euro Changeover and its Effects on Price Transparency and Inflation," Carlo Alberto Notebooks, Collegio Carlo Alberto 26, Collegio Carlo Alberto, revised 2006.
    2. Luigi Guiso & Paola Sapienza & Luigi Zingales, 2007. "Cultural Biases in Economic Exchange?," Economics Working Papers, European University Institute ECO2007/42, European University Institute.
    3. Charles Engel & John H. Rogers, 1999. "Deviations from Purchasing Power Parity:Causes and Welfare Costs," Working Papers, University of Washington, Department of Economics 0038, University of Washington, Department of Economics.
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    5. Jeffrey Frankel & Andrew Rose, 2002. "An Estimate Of The Effect Of Common Currencies On Trade And Income," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 117(2), pages 437-466, May.
    6. Parsley, David C. & Wei, Shang-Jin, 2001. "Explaining the border effect: the role of exchange rate variability, shipping costs, and geography," Journal of International Economics, Elsevier, Elsevier, vol. 55(1), pages 87-105, October.
    7. Edward L. Glaeser, 1998. "Are Cities Dying?," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 12(2), pages 139-160, Spring.
    8. Engel, Charles & Rogers, John H, 1996. "How Wide Is the Border?," American Economic Review, American Economic Association, American Economic Association, vol. 86(5), pages 1112-25, December.
    9. Hardouvelis, Gikas A & Malliaropoulos, Dimitrios & Priestley, Richard, 1999. "EMU and European Stock Market Integration," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2124, C.E.P.R. Discussion Papers.
    10. Bart Hobijn & Federico Ravenna & Andrea Tambalotti, 2006. "Menu Costs at Work: Restaurant Prices and the Introduction of the Euro," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 121(3), pages 1103-1131, 08.
    11. Ignazio Angeloni & Luc Aucremanne & Michael Ehrmann & Jordi Galí & Andrew Levin & Frank Smets, 2005. "New Evidence on Inflation Persistence and Price Stickiness in the Euro Area: Implications for Macro Modelling," Working Papers 242, Barcelona Graduate School of Economics.
    12. Marcus Asplund & Richard Friberg, 2001. "The Law of One Price in Scandinavian Duty-Free Stores," American Economic Review, American Economic Association, American Economic Association, vol. 91(4), pages 1072-1083, September.
    13. Michael R. Baye & J. Rupert J. Gatti & Paul Kattuman & John Morgan, 2005. "Did the Euro Foster Online Price Competition? Evidence from an International Price Comparison Site," Working Papers, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy 2005-09, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
    14. Lutz, Matthias, 2003. "Price Convergence under EMU? First Estimates," Royal Economic Society Annual Conference 2003, Royal Economic Society 143, Royal Economic Society.
    15. Charles Engel & John H. Rogers, 2004. "European product market integration after the euro," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 19(39), pages 347-384, 07.
    16. Andrew K. Rose & Eric van Wincoop, 2001. "National Money as a Barrier to International Trade: The Real Case for Currency Union," American Economic Review, American Economic Association, American Economic Association, vol. 91(2), pages 386-390, May.
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