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Nominal exchange rate regimes and relative price dispersion: On the importance of nominal exchange rate volatility for the width of the border

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  • Beck, Günter W.
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    Abstract

    Based on a broad set of regional aggregated and disaggregated consumer price index (CPI) data from major industrialized countries in Asia, North America and Europe we are examining the role that national borders play for goods market integration. In line with the existing literature we find that intra-national markets are better integrated than international market. Additionally, our results show that there is a large ‘ocean’ effect, i.e., intercontinental markets are significantly more segmented than intra-continental markets. To examine the impact of the establishment of the European Monetary Union (EMU) on integration, we split our sample into a pre-EMU and EMU sample. We find that border effects across EMU countries have declined by about 80% to 90% after 1999 whereas border estimates across non-EMU countries have remained basically unchanged. Since global factors have affected all countries in our sample similarly and major integration efforts across EMU countries were made before 1999, we suggest that most of the reduction in EMU border estimates has been ‘nominal’. Panel unit root evidence shows that the observed large differences in integration across intra- and inter-continental markets remain valid in the longrun. This finding implies that real factors are responsible for the documented segmentations across our sample countries. --

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    Bibliographic Info

    Paper provided by Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 2003/45.

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    Date of creation: 2003
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    Handle: RePEc:zbw:cfswop:200345

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    Keywords: Real exchange rate dispersion; real and nominal border effect; goods market integration; nominal exchange rate regime neutrality;

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    1. Stephen G. Cecchetti & Nelson C. Mark & Robert J. Sonora, 2000. "Price Level Convergence Among United States Cities: Lessons for the European Central Bank," NBER Working Papers 7681, National Bureau of Economic Research, Inc.
    2. Andrew K. Rose & Charles Engel, 2000. "Currency Unions and International Integration," NBER Working Papers 7872, National Bureau of Economic Research, Inc.
    3. Charles Engel & John H. Rogers, 2000. "Deviations from purchasing power parity: causes and welfare costs," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 666, Board of Governors of the Federal Reserve System (U.S.).
    4. Canzoneri, Matthew B. & Cumby, Robert E. & Diba, Behzad, 1999. "Relative labor productivity and the real exchange rate in the long run: evidence for a panel of OECD countries," Journal of International Economics, Elsevier, Elsevier, vol. 47(2), pages 245-266, April.
    5. Parsley, David & Wei, Shang-Jin, 2001. "Limiting Currency Volatility to Stimulate Goods Market Integration: a Price-Based Approach," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2958, C.E.P.R. Discussion Papers.
    6. Paul G. J. O'Connell & Shang-Jin Wei, 1997. ""The Bigger They Are, The Harder They Fall": How Price Differences Across U.S. Cities Are Arbitraged," NBER Working Papers 6089, National Bureau of Economic Research, Inc.
    7. Mario J. Crucini & Chris I. Telmer & Marios Zachariadis, 2000. "Dispersion in Real Exchange Rates," Vanderbilt University Department of Economics Working Papers 0013, Vanderbilt University Department of Economics.
    8. Goldberg, Pinelopi K. & Verboven, Frank, 2005. "Market integration and convergence to the Law of One Price: evidence from the European car market," Journal of International Economics, Elsevier, Elsevier, vol. 65(1), pages 49-73, January.
    9. David C. Parsley & Shang-Jin Wei, 2001. "Limiting Currency Volatility to Stimulate Goods Market Integration," IMF Working Papers 01/197, International Monetary Fund.
    10. Michael B. Devereux & Charles Engel, 1998. "Fixed vs. Floating Exchange Rates: How Price Setting Affects the Optimal Choice of Exchange-Rate Regime," NBER Working Papers 6867, National Bureau of Economic Research, Inc.
    11. Hall, Alastair R, 1994. "Testing for a Unit Root in Time Series with Pretest Data-Based Model Selection," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 12(4), pages 461-70, October.
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