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Price Convergence in Europe from a Macro Perspective: Product Categories and Reliability

  • Riemer P. Faber
  • Ad C.J. Stokman

In an earlier study of ours, we provided evidence of consumer price level convergence in Europe, particularly in the 1960s and the 1990s (Faber and Stokman, 2004). The analysis was based on transformations of country HICP indices into absolute price levels, by combining time series HICP data back to 1960 with nominal figures of HICP for one particular benchmark year (1999). In this paper, we demonstrate that this simple procedure delivers reliable estimates of absolute price levels both for short and longer time spans. We adopt this methodology to analyse price dispersion at the onedigit level of HICP in the former EU-15 member states (1980-2003). We find strong price level convergence for most of the product groups in the early 1990s. However, price dispersion levels for tradable products are still much smaller than for non-tradable products. Compared to the US, the dispersion level of consumer prices has always been higher in the euro area, but EMU is narrowing the gap. Price dispersion within the smaller DM-zone is below American levels.

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Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 034.

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Date of creation: Apr 2005
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Handle: RePEc:dnb:dnbwpp:034
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Web page: http://www.dnb.nl/en/

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  1. Mario J. Crucini & Chris I. Telmer & Marios Zachariadis, 2005. "Understanding European Real Exchange Rates," American Economic Review, American Economic Association, vol. 95(3), pages 724-738, June.
  2. Stephen G. Cecchetti & Nelson C. Mark & Robert J. Sonora, 2002. "Price Index Convergence Among United States Cities," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(4), pages 1081-1099, November.
  3. John H. Rogers & Gary Clyde Hufbauer & Erika Wada, 2001. "Price Level Convergence and Inflation in Europe," Working Paper Series WP01-1, Peterson Institute for International Economics.
  4. Charles Engel & John H. Rogers, 1999. "Deviations from Purchasing Power Parity:Causes and Welfare Costs," Discussion Papers in Economics at the University of Washington 0038, Department of Economics at the University of Washington.
  5. Pinelopi Koujianou Goldberg & Frank Verboven, 1998. "The Evolution of Price Dispersion in the European Car Market," NBER Working Papers 6818, National Bureau of Economic Research, Inc.
  6. Goldberg, Pinelopi & Verboven, Frank, 2001. "Market Integration and Convergence to the Law of One Price: Evidence from the European Car Market," CEPR Discussion Papers 2926, C.E.P.R. Discussion Papers.
  7. 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.).
  8. Pinelopi Koujianou Goldberg & Frank Verboven, 2004. "Cross-country price dispersion in the euro era: a case study of the European car market," Economic Policy, CEPR;CES;MSH, vol. 19(40), pages 483-521, October.
  9. 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.).
  10. Chen, L. L. & Devereux, J., 2003. "What can US city price data tell us about purchasing power parity?," Journal of International Money and Finance, Elsevier, vol. 22(2), pages 213-222, April.
  11. 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.
  12. 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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