How different are Monetary Unions to national economies according to prices?

Marina Glushenkova and Marios Zachariadis

International Journal of Finance & Economics, 2024, vol. 29, issue 1, 684-702

Abstract: Not that different. Based on a unique dataset of semi‐annual microeconomic price levels of goods and services across and within countries for 1990:1–2018:2, we show that time‐series volatility and cross‐sectional dispersion of law‐of‐one‐price deviations are similar for pairs of cities within the same country and across the Eurozone eleven original members. Our empirical analysis reveals that inflation and nominal exchange rate volatility/dispersion across locations have a positive impact on the volatility/dispersion across locations of law‐of‐one‐price deviations across the globe. Furthermore, dispersion of law‐of‐one‐price deviations across goods falls when the relative inflation rate between these locations rises, suggesting that the degree of price adjustment in individual product markets within a country has an international component shaped by international trade and arbitrage considerations. According to this measure of price integration, economies within the monetary union are half‐way to the level of integration characterizing national economies. Moreover, monetary union membership is associated with lower volatility of law‐of‐one‐price deviations, placing member countries more than half‐way towards the volatility levels characterizing national economies.

Date: 2024
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https://doi.org/10.1002/ijfe.2704

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Working Paper: How different are Monetary Unions to national economies according to prices? (2020)
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