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Currency Arrangements And Goods Market Integration: A Price Based Approach

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Author Info
David Parsley Shang-Jin Wei

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Abstract

Recent studies of the effect of currency arrangements on goods market integration (starting with Rose, 2000) employ a methodology based on volumes of trade. However, the connection between market integration and trade flows can be loose. In this paper, we adopt a different methodology that uses a 3-dimensional panel of prices of 95 very disaggregated goods (e.g., light bulbs) in 83 cities around the world from 1990 to 2000. We find that the impact of an institutionalized stabilization of the exchange rate, i.e., a currency board or a currency union, generally provides a stimulus to goods market integration that goes far beyond reducing exchange rate volatility to zero. However, there are important exceptions. 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 U.S. benchmark.

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Paper provided by EconWPA in its series International Finance with number 0211004.

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Length: 46 pages
Date of creation: 11 Nov 2002
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Handle: RePEc:wpa:wuwpif:0211004

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Related research
Keywords: goods market integration band of deviations from Law of One Price

Find related papers by JEL classification:
F3 - International Economics - - International Finance
F2 - International Economics - - International Factor Movements and International Business

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References listed on IDEAS
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.:
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  5. Engel, Charles & Rogers, John H, 1996. "How Wide Is the Border?," American Economic Review, American Economic Association, vol. 86(5), pages 1112-25, December. [Downloadable!] (restricted)
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  6. Richardson, J. David, 1978. "Some empirical evidence on commodity arbitrage and the law of one price," Journal of International Economics, Elsevier, vol. 8(2), pages 341-351, May. [Downloadable!] (restricted)
  7. Andrew K. Rose & Charles Engel, 2000. "Currency Unions and International Integration," NBER Working Papers 7872, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Jeffrey Frankel & Andrew Rose, 2002. "An Estimate Of The Effect Of Common Currencies On Trade And Income," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 437-466, May. [Downloadable!] (restricted)
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  11. John H. Rogers, 2001. "Price level convergence, relative prices, and inflation in Europe," International Finance Discussion Papers 699, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  14. Michael W. Klein, 2002. "Dollarization and Trade," NBER Working Papers 8879, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  15. Rose, Andrew K, 1999. "One Money, One Market: Estimating the Effect of Common Currencies on Trade," CEPR Discussion Papers 2329, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  16. Torsten Persson, 2001. "Currency unions and trade: how large is the treatment effect?," Economic Policy, CEPR, CES, MSH, vol. 16(33), pages 433-462, October. [Downloadable!] (restricted)
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  19. Obstfeld, Maurice & Taylor, Alan M., 1997. "Nonlinear Aspects of Goods-Market Arbitrage and Adjustment: Heckscher's Commodity Points Revisited," Journal of the Japanese and International Economies, Elsevier, vol. 11(4), pages 441-479, December. [Downloadable!] (restricted)
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  20. Marianne Baxter & Robert G. King, 1995. "Measuring Business Cycles Approximate Band-Pass Filters for Economic Time Series," NBER Working Papers 5022, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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Full references

Cited by:
(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. Paul R. Bergin & Reuven Glick, 2006. "Global price dispersion: are prices converging or diverging?," Working Paper Series 2006-50, Federal Reserve Bank of San Francisco. [Downloadable!]
    Other versions:
  2. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," Journal of Economic Literature, American Economic Association, vol. 42(3), pages 691-751, September. [Downloadable!] (restricted)
    Other versions:
  3. John H. Rogers, 2002. "Monetary union, price level convergence, and inflation: how close is Europe to the United States?," International Finance Discussion Papers 740, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  4. Yuriy Gorodnichenko & Linda Tesar, 2005. "A Re-Examination of the Border Effect," NBER Working Papers 11706, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Michael B. Devereux & Charles Engel, 2006. "Expenditure switching versus real exchange rate stabilization - competing objectives for exchange rate policy," Working Paper Series 614, European Central Bank. [Downloadable!]
    Other versions:
  6. Bris, Arturo & Koskinen, Yrjö & Nilsson, Mattias, 2003. "The Euro and Corporate Valuations," Working Paper Series in Economics and Finance 525, Stockholm School of Economics, revised 06 Dec 2003. [Downloadable!]
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