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Price convergence in the enlarged internal market

Author Info

Listed author(s):
  • Christian Dreger
  • Konstantin Kholodilin
  • Kirsten Lommatzsch
  • Jirka Slacalek
  • Przemyslaw Wozniak

Abstract

The studies' main aim is to investigate the effects of the EU-10 enlargement on price convergence within the Internal Market. It distinguishes between the opposite forces provided by: (1) the catching up effect of the EU-10, expected to lead to a rise in price levels; and (2) increased competitiveness pressure on prices expected to lower price levels due to lower mark ups of prices over marginal costs. The study is based on comparative price levels for the EU-25, covering the period 1999-2004. Distinct variables were identified as proxies for the catching-up and competition forces. The following analysis proceeded in two steps. First, it is examined whether price convergence has occurred and, second, what are its main drivers. The results confirm the presence of price convergence. This process is particularly visible in the case of basic headings, most likely because they are related to more homogeneous products. Moreover, both catching up and competition have been important factors for explaining price convergence. In addition, both effects seem to be more pronounced for the EU-10 than for the EU-15.

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File URL: http://ec.europa.eu/economy_finance/publications/pages/publication10179_en.pdf
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Paper provided by Directorate General Economic and Financial Affairs (DG ECFIN), European Commission in its series European Economy - Economic Papers 2008 - 2015 with number 292.

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Length: 93 pages
Date of creation: Nov 2007
Handle: RePEc:euf:ecopap:0292
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Keywords: EU enlargement; Internal Market; price convergence; Balassa Samuelson effect; competition; Dreger; Kholodilin; Lommatzsch; Slacalek; Wozniak;

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Find related papers by JEL classification:
  • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
  • F15 - International Economics - - Trade - - - Economic Integration
  • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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Cited by:

  1. Joanna Wolszczak-Derlacz & Rembert De Blander, 2009. "Price convergence in the European Union and in the New Member States," Bank i Kredyt, Narodowy Bank Polski, vol. 40(2), pages 37-59.
  2. Václav Žďárek, 2011. "Empirická analýza průběhu cenové konvergence ČR a nových členských zemí EU k eurozóně
    [An Empirical Analysis of Price Convergence of the Czech Republic and the New EU Member States towards the Euro    ," Politická ekonomie, University of Economics, Prague, vol. 2011(4), pages 454-474.
  3. Christian Dreger & Eric Girardin, 2007. "Does the Nominal Exchange Rate Regime Affect the Long Run Properties of Real Exchange Rates?," Discussion Papers of DIW Berlin 746, DIW Berlin, German Institute for Economic Research.
  4. Marina Glushenkova & Marios Zachariadis, 2014. "Understanding Law-of-One-Price Deviations across Europe Before and After the Euro," University of Cyprus Working Papers in Economics 01-2014, University of Cyprus Department of Economics.
  5. Leon Podkaminer, 2013. "Persistent gaps between purchasing power parities and exchange rates under the law of one price: a puzzle (partly) explained?," Bank i Kredyt, Narodowy Bank Polski, vol. 44(4), pages 333-352.
  6. Jan-Egbert Sturm & Ulrich Fritsche & Michael Graff & Michael Lamla & Sarah Lein & Volker Nitsch & David Liechti & Daniel Triet, 2009. "The euro and prices: changeover-related inflation and price convergence in the euro area," European Economy - Economic Papers 2008 - 2015 381, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.

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