Behavior of retail prices in common currency areas: The case of the Eurozone
Alex Nikolsko-Rzhevskyy and
Olena Ogrokhina ()
Economic Modelling, 2018, vol. 69, issue C, 49-57
Does a common currency lead to price convergence? In this paper we both theoretically and empirically show that the effect of a common currency is ambiguous. First, we extend the Ganslandt and Maskus (2007) model of vertical pricing with parallel trade. Our innovation is to consider both domestic trade, where trading costs are relatively low, and international trade, where trading costs are relatively high. If trading costs decline, the model predicts price divergence in the former case, and price convergence in the latter case. Second, using the introduction of the euro as a natural experiment that reduced trading costs, we employ difference-in-differences estimation strategy to test the model's predictions. Our results show that while individual goods prices between countries converged by 2%, within-country prices diverged by 4%, supporting the predictions of our model.
Keywords: Price divergence; Common currency; Eurozone; Difference-in-differences (search for similar items in EconPapers)
JEL-codes: E31 F14 F15 F36 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:69:y:2018:i:c:p:49-57
Access Statistics for this article
Economic Modelling is currently edited by S. Hall and P. Pauly
More articles in Economic Modelling from Elsevier
Bibliographic data for series maintained by Haili He ().