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Price dispersion in Europe: Does the business cycle matter?

  • Marco Hoeberichts
  • Ad Stokman

We analyze the effect of the business cycle on price dispersion in Europe . Five decades of price level dispersion data for Europe enable us to distinguish short-term influences from long-term influences like market integration. We find that at the business cycle frequency, price dispersion across EMU member countries over the 1960 - 2009 period is significantly lower during economic downturns. This confirms on a macroeconomic level the evidence from micro and survey studies that markets become more competitive with falling demand, reducing deviations from the Law of One Price. Our model replicates most of the major drops in price level dispersion during severe economic recessions of the early 1970s, 1980s and 1990s, as well as the small change during the recent financial crisis.

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File URL: http://www.dnb.nl/en/binaries/working%20paper%20285_tcm47-252979.pdf
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Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 285.

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Date of creation: Mar 2011
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Handle: RePEc:dnb:dnbwpp:285
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Web page: http://www.dnb.nl/en/

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