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The Euro Changeover and Its Effects on Price Transparency, and Inflation. Mission Euro, Mission Accomplished!

Author

Listed:
  • Giovanni Mastrobuoni

    (Princeton University)

  • Wioletta Dziuda

    (Princeton University)

Abstract

Despite the expectations of economists that the euro changeover would have no effect on prices, we show that European consumers perceive the contrary. The data indicate that consumers based their perceptions about inflation on goods that are cheaper and more frequently purchased. We use this insight to develop and estimate a model of imperfect information that explains why these goods were subject to higher price growth after the changeover. The data indicate that some retailers, aware of the consumers' difficulties in adopting the new currency, used the changeover to increase profits by increasing prices. We also propose an explanation on why, contrary to common belief, this effect was smaller in more concentrated retail markets.

Suggested Citation

  • Giovanni Mastrobuoni & Wioletta Dziuda, 2005. "The Euro Changeover and Its Effects on Price Transparency, and Inflation. Mission Euro, Mission Accomplished!," International Finance 0503003, University Library of Munich, Germany, revised 24 May 2005.
    • Handle: RePEc:wpa:wuwpif:0503003
    Note: Type of Document - pdf; pages: 49
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/if/papers/0503/0503003.pdf
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    References listed on IDEAS

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    1. Kathy Baylis & Jeffrey Perloff, 2002. "Price Dispersion on the Internet: Good Firms and Bad Firms," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 21(3), pages 305-324, November.
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    Cited by:

    1. Michael Artis, 2008. "What do we now know about currency unions?," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 1(1), pages 13-29.
    2. Bart Hobijn & Federico Ravenna & Andrea Tambalotti, 2006. "Menu Costs at Work: Restaurant Prices and the Introduction of the Euro," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(3), pages 1103-1131.
    3. Krystian Mucha, 2010. "Czynniki wyjaśniające zjawisko luki percepcji wśród konsumentów w okresie przyjmowania euro," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 1-2, pages 67-87.
    4. Paolo Angelini & Francesco Lippi, 2008. "Did prices really soar after the euro cash changeover? Evidence from ATM withdrawals," Springer Books, in: Paolo Giovane & Roberto Sabbatini (ed.), The Euro, Inflation and Consumer’s Perceptions, chapter 4, pages 109-124, Springer.
    5. Lippi, Francesco & Angelini, Paolo, 2005. "Did Inflation Really Soar After the Euro Cash Changeover? Indirect Evidence from ATM Withdrawals," CEPR Discussion Papers 4950, C.E.P.R. Discussion Papers.
    6. Antonides, Gerrit, 2008. "How is perceived inflation related to actual price changes in the European Union?," Journal of Economic Psychology, Elsevier, vol. 29(4), pages 417-432, August.

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    More about this item

    Keywords

    euro; currency changeover; imperfect information; search costs; price setting;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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