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Labor-Cost Effects on Relative Prices between Regions of a Monetary Union: Implications for the EMU

Three industrial organization (IO) models suggested by Dornbusch (1987) are here adapted to study the labor-cost effects on relative prices of tradable goods between the regions of a monetary union. The assumption of imperfect and segmented goods and labor markets makes the analysis best suited for a monetary union such as the present European EMU. We find that in this context the type and extent of the effects studied depend on the different degree of competition in the same industry of different countries, the different absolute or relative number of foreign and domestic firms in the market of each country, and the product substitutability. Very simple simulations show the potentiality of IO models in a dynamic framework.

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Paper provided by Universita' degli Studi di Firenze, Dipartimento di Statistica, Informatica, Applicazioni "G. Parenti" in its series Econometrics Working Papers Archive with number wp2002_20.

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Length: 39 pages
Date of creation: Apr 2002
Date of revision:
Handle: RePEc:fir:econom:wp2002_20
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  1. Engel, Charles & Rogers, John H, 2001. "Violating the Law of One Price: Should We Make a Federal Case Out of It?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(1), pages 1-15, February.
  2. Stephen Cecchetti & Nelson C. Mark & Robert Sonora, 1998. "Price Level Convergence Among United States Cities: Lessons for the European Central Bank," Working Papers 32, Oesterreichische Nationalbank (Austrian Central Bank).
  3. David C. Parsley & Shang-Jin Wei, 1996. "Convergence to the Law of One Price Without Trade Barriers or Currency Fluctuations," NBER Working Papers 5654, National Bureau of Economic Research, Inc.
  4. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  5. Giovanni Arese-Visconti, 2002. "Inflation Differentials before and after the EMU," Econometrics Working Papers Archive wp2002_19, Universita' degli Studi di Firenze, Dipartimento di Statistica, Informatica, Applicazioni "G. Parenti".
  6. Eichengreen, Barry, 1998. "European Monetary Unification: A Tour d'Horizon," Oxford Review of Economic Policy, Oxford University Press, vol. 14(3), pages 24-40, Autumn.
  7. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
  8. Irving B. Kravis & Robert E. Lipsey & Eliot R. J. Kalter, 1977. "Export Prices and Exchange Rates," NBER Working Papers 0182, National Bureau of Economic Research, Inc.
  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. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
  11. Maddala, G S & Wu, Shaowen, 1999. " A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 631-52, Special I.
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