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The impact of monetary union on trade prices

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Abstract

Two seemingly unconnected empirical results suggest an intriguing mechanism. Firstly, economic integration helps harmonize prices internationally, with trade being the primary channel [Rogoff (1996), Goldberg and Knetter (1997)]. Secondly, monetary union may greatly increase the amount of trade among members [Rose (2001)]. Putting these together, we see that formation of a monetary union may induce changes that help harmonize inflation rates. The effect might be large if the elimination of exchange rate volatility simultaneously leads to a large increase in intra-union trade and a big increase in the speed at which price shocks are transmitted across members’ goods markets. This paper investigates part of this mechanism and finds that monetary union may indeed result in faster cross-border transmission of price movements via the import and export price channel which, in turn, would tend to homogenize price movements across the member countries of a monetary union.

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  • Robert, Anderton & Baldwin, Richard & Taglioni, Daria, 2007. "The impact of monetary union on trade prices," Journal of Financial Transformation, Capco Institute, vol. 19, pages 35-48.
    • Handle: RePEc:ris:jofitr:0871
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    1. Richard E. Baldwin & Virginia Di Nino, 2006. "Euros and Zeros: The Common Currency Effect on Trade in New Goods," NBER Working Papers 12673, National Bureau of Economic Research, Inc.
    2. Marco G. Ercolani & Jayasri Dutta, 2006. "The Euro-changeoverand Euro-inflation: Evidence from Eurostat's HICP," Discussion Papers 06-03, Department of Economics, University of Birmingham.
    3. Méjean, Isabelle & Schwellnus, Cyrille, 2009. "Price convergence in the European Union: Within firms or composition of firms?," Journal of International Economics, Elsevier, vol. 78(1), pages 1-10, June.
    4. Hoang Sang Nguyen & Fabien Rondeau, 2019. "The transmission of business cycles: Lessons from the 2004 enlargement of the EU and the adoption of the euro," Economics of Transition and Institutional Change, John Wiley & Sons, vol. 27(3), pages 729-743, July.
    5. Ascari, Guido & Rankin, Neil, 2007. "Perpetual youth and endogenous labor supply: A problem and a possible solution," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 708-723, December.
    6. Philipp Maier, 2005. "A global village without borders? international price differentials at eBay," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
    7. Philipp Maier, 2004. "EMU enlargement, inflation and adjustment of tradable goods prices: What to expect?," DNB Working Papers 010, Netherlands Central Bank, Research Department.

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    More about this item

    Keywords

    exchange rate volatility; monetary union; market segmentation; no-arbitrage bands; harmonisation of price movements; price convergence;
    All these keywords.

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • F15 - International Economics - - Trade - - - Economic Integration
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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