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The Impact of Monetary Union on Trade Prices

Author

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  • Anderton, Robert

    (European Central Bank)

  • Richard E Baldwin
  • Daria Taglioni

Abstract

Two seemingly unconnected empirical results suggest an intriguing mechanism. First, economic integration helps harmonize prices internationally, with trade being the primary channel (Rogoff 1996, Goldberg and Knetter 1997). Second, 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 harmonise 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. The problem is that standard estimates of price transmission speed suggest that trade's price-homogenising effect operates too slowly to matter much. Some new empirical evidence, however, suggests that a reduction in exchange rate variability reduces the variability of international price differences. Moreover, the effect seems to be highly nonlinear, and monetary union seems to have an effect even controlling for exchange rate volatility. This paper is a first attempt to piece together part of this mechanism, namely the impact of monetary union (and exchange rate volatility more generally) on the international transmission of price shocks via the imported/exported inflation channel. In doing this we generate specific testable hypotheses and confront these with a number of data sets on European trade prices.

Suggested Citation

  • Anderton, Robert & Richard E Baldwin & Daria Taglioni, 2003. "The Impact of Monetary Union on Trade Prices," Royal Economic Society Annual Conference 2003 5, Royal Economic Society.
  • Handle: RePEc:ecj:ac2003:5
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    References listed on IDEAS

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    Cited by:

    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. Philipp Maier, 2005. "A global village without borders? international price differentials at eBay," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
    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, 2004. "EMU enlargement, inflation and adjustment of tradable goods prices: What to expect?," DNB Working Papers 010, Netherlands Central Bank, Research Department.

    More about this item

    Keywords

    price arbitrage; exchange rate volatility; monetary union; market segmentation; non-linearities; no-arbitrage bands; harmonisation of price movements;

    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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