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Price level convergence within the euro area: How Europe caught up with the US and lost terrain again

Marco Hoeberichts () and Ad Stokman ()

DNB Working Papers from Netherlands Central Bank, Research Department

Abstract: Persistent price differences across euro area countries are an indication of incomplete economic integration. We analyze long and short run developments of price level dispersion in the euro area and compare the results with the situation in the US. We find that monetary and economic integration in Europe has been successful in establishing a major downward trend in price level differences across countries since 1960. In 2007, price level dispersion in the euro area was at the same level as in the US. After the financial crisis, dispersion first continued its downward trend before diverging economic conditions across euro area countries contributed to a widening of price level differences again. Short-run dynamics show that price dispersion in Europe deviates more from the long-term equilibrium than in the US, although deviations have become smaller since EMU.

Keywords: economic integration; price-level convergence; law of one price; EMU; US (search for similar items in EconPapers)
JEL-codes: E31 E37 F15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec, nep-mac, nep-mon and nep-opm
Date: 2016-01
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