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Limiting Currency Volatility to Stimulate Goods Market Integration: A Price-Based Approach

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  • Mr. David C. Parsley
  • Shang-Jin Wei

Abstract

This paper studies the effect of instrumental and institutional stabilization of exchange rate volatility on the integration of goods markets. Rather than using data on volume of trade, this paper employs a 3-dimensional panel of prices of 95 very disaggregated goods (e.g., light bulbs) in 83 cities around the world during 1990-2000. We find that the impact of an institutional stabilization-currency board or dollarization-promotes market integration far beyond an instrumental stabilization. Among them, long-term currency unions are more effective than more recent currency boards. All have room to improve relative to a U.S. benchmark.

Suggested Citation

  • Mr. David C. Parsley & Shang-Jin Wei, 2001. "Limiting Currency Volatility to Stimulate Goods Market Integration: A Price-Based Approach," IMF Working Papers 2001/197, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:2001/197
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    References listed on IDEAS

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    1. Paul G. J. O'Connell & Shang-Jin Wei, 1997. ""The Bigger They Are, The Harder They Fall": How Price Differences Across U.S. Cities Are Arbitraged," NBER Working Papers 6089, National Bureau of Economic Research, Inc.
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    More about this item

    Keywords

    WP; price dispersion; goods market integration; price difference; common currency; exchange rate variability; Hard pegs; currency union; dollarization; market integration; price comparison; exchange rate volatility; percentage price deviation; price data; Exchange rates; Conventional peg; Tariffs; Currency boards; Currencies; Europe;
    All these keywords.

    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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