IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Understanding European Real Exchange Rates

We study good-by-good deviations from the Law-of-One-Price for over 5,000 goods and services between European Union countries for the years 1975, 1980, 1985 and 1990. We find that between most countries there are roughly as many overpriced goods as there are underpriced goods. This feature is robust across years, in spite of relatively large movements in nominal exchange rates. Equally-weighted and CPI-weighted averages of good-by-good relative prices generate relatively accurate predictions of most nominal cross-rates, as purchasing power parity would suggest. Variation around the averages is large but is found to be related to economically meaningful characteristics of goods such as international tradeability, non-tradedness of factors of production and the competitive structure of the markets in which the goods are sold. Using data on product brands, we find that product heterogeneity is at least as important as geography in explaining relative price dispersion. Overall, our data provide strong evidence that international goods markets are segmented, but (i) the evidence relies on absolute deviations from the Law-of-One-Price, not deviations from PPP, (ii) some markets are much more segmented than others, with the disinctions being well predicted by economic theory.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://bertha.tepper.cmu.edu/files/papers/ctz1.ps
Our checks indicate that this address may not be valid because: 404 Not Found. If this is indeed the case, please notify (Steve Spear)


Download Restriction: no

Paper provided by Carnegie Mellon University, Tepper School of Business in its series GSIA Working Papers with number 227.

as
in new window

Length:
Date of creation:
Date of revision:
Handle: RePEc:cmu:gsiawp:227
Contact details of provider: Postal: Tepper School of Business, Carnegie Mellon University, 5000 Forbes Avenue, Pittsburgh, PA 15213-3890
Web page: http://www.tepper.cmu.edu/

Order Information: Web: http://student-3k.tepper.cmu.edu/gsiadoc/GSIA_WP.asp

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.:

as in new window
  1. Stockman, Alan C & Tesar, Linda L, 1995. "Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements," American Economic Review, American Economic Association, vol. 85(1), pages 168-85, March.
  2. Engel, C. & Rogers, J.H., 1995. "How Wide is the Border?," Papers 4-95-16, Pennsylvania State - Department of Economics.
  3. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "A panel project on purchasing power parity: Mean reversion within and between countries," Journal of International Economics, Elsevier, vol. 40(1-2), pages 209-224, February.
  4. Maurice Obstfeld & Kenneth Rogoff, 1994. "Exchange Rate Dynamics Redux," NBER Working Papers 4693, National Bureau of Economic Research, Inc.
  5. Mario J Crucini & Mototsugu Shintani, 2002. "Persistence in Law-of-One-Price Deviations: Evidence From Micro-Price Data," NajEcon Working Paper Reviews 506439000000000019, www.najecon.org.
  6. Knetter, Michael M, 1993. "International Comparisons of Price-to-Market Behavior," American Economic Review, American Economic Association, vol. 83(3), pages 473-86, June.
  7. Froot, Kenneth A. & Kim, Michael & Rogoff, Kenneth, 1995. "The Law of One Price Over 700 Years," Working Papers 95-13, C.V. Starr Center for Applied Economics, New York University.
  8. Sercu, Piet & Uppal, Raman & Van Hulle, Cynthia, 1995. " The Exchange Rate in the Presence of Transaction Costs: Implications for Tests of Purchasing Power Parity," Journal of Finance, American Finance Association, vol. 50(4), pages 1309-19, September.
  9. Dumas, Bernard, 1992. "Dynamic Equilibrium and the Real Exchange Rate in a Spatially Separated World," Review of Financial Studies, Society for Financial Studies, vol. 5(2), pages 153-80.
  10. Jonathan Haskel & Holger C. Wolf, 2001. "The Law of One Price - A Case Study," CESifo Working Paper Series 428, CESifo Group Munich.
  11. Harry Flam, 1992. "Product Markets and 1992: Full Integration, Large Gains?," Journal of Economic Perspectives, American Economic Association, vol. 6(4), pages 7-30, Fall.
  12. Irving B. Kravis & Robert E. Lipsey, 1982. "Towards an Explanation of National Price Levels," NBER Working Papers 1034, National Bureau of Economic Research, Inc.
  13. Robert E. Cumby, 1996. "Forecasting Exchange Rates and Relative Prices with the Hamburger Standard: Is What You Want What You Get With McParity?," NBER Working Papers 5675, National Bureau of Economic Research, Inc.
  14. Rogers, John H. & Jenkins, Michael, 1995. "Haircuts or hysteresis? Sources of movements in real exchange rates," Journal of International Economics, Elsevier, vol. 38(3-4), pages 339-360, May.
  15. Haskel, Jonathan & Wolf, Holger C, 1999. "Why Does the 'Law of One Price' Fail? A Case Study," CEPR Discussion Papers 2187, C.E.P.R. Discussion Papers.
  16. Carolyn L. Evans, 2003. "The Economic Significance of National Border Effects," American Economic Review, American Economic Association, vol. 93(4), pages 1291-1312, September.
  17. Giovannini, Alberto, 1988. "Exchange rates and traded goods prices," Journal of International Economics, Elsevier, vol. 24(1-2), pages 45-68, February.
  18. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
  19. 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.).
  20. Charles Engel & John H. Rogers, 2004. "European product market integration after the euro," Economic Policy, CEPR;CES;MSH, vol. 19(39), pages 347-384, 07.
  21. Isard, Peter, 1977. "How Far Can We Push the "Law of One Price"?," American Economic Review, American Economic Association, vol. 67(5), pages 942-48, December.
  22. Paul Krugman, 1986. "Pricing to Market when the Exchange Rate Changes," NBER Working Papers 1926, National Bureau of Economic Research, Inc.
  23. David C. Parsley & Shang-Jin Wei, 2000. "Explaining the Border Effect: The Role of Exchange Rate Variability, Shipping Costs, and Geography," NBER Working Papers 7836, National Bureau of Economic Research, Inc.
  24. Ethier, Wilfred, 1979. "Internationally decreasing costs and world trade," Journal of International Economics, Elsevier, vol. 9(1), pages 1-24, February.
  25. Sanyal, Kalyan K & Jones, Ronald W, 1982. "The Theory of Trade in Middle Products," American Economic Review, American Economic Association, vol. 72(1), pages 16-31, March.
  26. 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.
  27. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584.
  28. Atish R. Ghosh & Holger C. Wolf, 1994. "Pricing in International Markets: Lessons From The Economist," NBER Working Papers 4806, National Bureau of Economic Research, Inc.
  29. Murray, Christian J. & Papell, David H., 2005. "Do Panels Help Solve the Purchasing Power Parity Puzzle?," Journal of Business & Economic Statistics, American Statistical Association, vol. 23, pages 410-415, October.
  30. Charles Engel, 1992. "Real Exchange Rates and Relative Prices: An Empirical Investigation," NBER Working Papers 4231, National Bureau of Economic Research, Inc.
  31. Crownover, Collin & Pippenger, John & Steigerwald, Douglas G., 1996. "Testing for absolute purchasing power parity," Journal of International Money and Finance, Elsevier, vol. 15(5), pages 783-796, October.
  32. Knetter, Michael M, 1989. "Price Discrimination by U.S. and German Exporters," American Economic Review, American Economic Association, vol. 79(1), pages 198-210, March.
  33. Matthias Lutz, 2004. "Pricing in Segmented Markets, Arbitrage Barriers, and the Law of One Price: Evidence from the European Car Market," Review of International Economics, Wiley Blackwell, vol. 12(3), pages 456-475, 08.
  34. Sven W. Arndt & J. David Richardson, 1987. "Real-Financial Linkages Among Open Economies," NBER Working Papers 2230, National Bureau of Economic Research, Inc.
Full references (including those not matched with items on IDEAS)

This item is featured on the following reading lists or Wikipedia pages:

  1. Understanding European Real Exchange Rates (AER 2005) in ReplicationWiki
  2. Canadian Macro Study Group

When requesting a correction, please mention this item's handle: RePEc:cmu:gsiawp:227. 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: (Steve Spear)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.