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Common Currency, Common Market?

  • Richard Friberg

    ()

    (Stockholm School of Economics)

Does the common currency promote goods market integration within the EMU? We argue that such an effect is likely, but that the mechanism typically proposed – lover costs of arbitrage because of increased price transparency – is likely to be of minor importance. Instead we sketch a duopoly model which stresses that lover possibility of future real exchange rate variability lowers the option value of being able to price discriminate. The euro would promote market integration because it is less valuable for firms to segment markets. In addition we argue that fairness concerns and less risk associated with third party arbitrage may be potentially important.

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File URL: http://econ.core.hu/doc/dp/dp/mtdp0305.pdf
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Paper provided by Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences in its series IEHAS Discussion Papers with number 0305.

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Length: 18 pages
Date of creation: May 2003
Date of revision:
Handle: RePEc:has:discpr:0305
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  1. Mario J. Crucini & Chris I. Telmer & Marios Zachariadis, 2001. "Understanding European Real Exchange Rates," Vanderbilt University Department of Economics Working Papers 0120, Vanderbilt University Department of Economics.
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  13. Engel, Charles & Rogers, John H, 1996. "How Wide Is the Border?," American Economic Review, American Economic Association, vol. 86(5), pages 1112-25, December.
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