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Price Convergence in the Enlarged Internal Market

Christian Dreger (), Konstantin Kholodilin (), Kirsten Lommatzsch (), Jiri Slacalek () and Przemyslaw Wozniak

No 730, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: In this paper we investigate the effects of EU enlargement on price convergence. The internal market is expected to boost integration and increase efficiency and welfare through a convergence of prices in product markets. Two principal drivers are crucial to explain price developments. On the one hand, higher competition exerts a downward pressure on prices because of lower mark ups. On the other hand, the catching up process of low income countries leads to a rise in the price levels and higher inflation over a transition period. Using comparative price levels for 41 product categories price convergence can be established. However, the speed of convergence is rather slow, with half lives around 10 years. The enlargement has slightly stimulated convergence towards the mean price, and this impact is robust across different groups of countries. Moreover, the driving forces of convergence are explored. In line with theoretical predictions, the rise in competition exerts a downward pressure on prices, while catching up of low income countries leads to a rise in price levels and higher inflation. The findings have important implications, as price convergence facilitates the working of common economic policies.

Keywords: EU enlargement; price convergence; catching up and competition (search for similar items in EconPapers)
JEL-codes: E31 F15 C33 (search for similar items in EconPapers)
Pages: 19 p.
Date: 2007
New Economics Papers: this item is included in nep-cba, nep-eec and nep-mac
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Related works:
Journal Article: Price Convergence in an Enlarged Internal Market (2008) Downloads
Working Paper: Price convergence in the enlarged internal market (2007) Downloads
Working Paper: Price Convergence in the Enlarged Internal Market (2007) Downloads
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