Price Convergence in an Enlarged Internal Market
This paper investigates the effects of EU enlargement on price convergence. The internal market is expected to boost integration and increase efficiency and welfare through a convergence of prices in product markets. Two principal drivers are crucial to explain price developments. On one hand, higher competition exerts downward pressure on prices because of lower markups. On the other hand, the catching-up process of lowincome countries leads to a rise in price levels and higher inflation over a transition period. Using comparative price levels for forty-one product categories, price convergence can be established. However, the speed of convergence is rather slow, with half-lives of approximately ten years. The enlargement has stimulated convergence slightly toward the mean price; this effect is robust across different groups of countries. Moreover, the driving forces of convergence are explored. In line with theoretical predictions, the rise in competition exerts downward pressure on prices, whereas catching-up of low-income countries leads to a rise in price levels and higher inflation. The findings have important implications, as price convergence facilitates the working of common economic policies.
Volume (Year): 46 (2008)
Issue (Month): 5 (September)
|Contact details of provider:|| Web page: http://www.tandfonline.com/MEEE20|
|Order Information:||Web: http://www.tandfonline.com/pricing/journal/MEEE20|
When requesting a correction, please mention this item's handle: RePEc:taf:eaeuec:v:46:y:2008:i:5:p:57-68. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Chris Longhurst)
If references are entirely missing, you can add them using this form.