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

Marina Glushenkova and Marios Zachariadis

University of Cyprus Working Papers in Economics from University of Cyprus Department of Economics

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 is similar for pairs of cities within the same country and within the European Monetary Union. 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 reduces the volatility of law-of-one-price deviations, taking member countries more than half-way towards the volatility levels characterizing national economies.

Keywords: Law-of-one-price; border effect; economic integration (search for similar items in EconPapers)
JEL-codes: F4 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2020-03
New Economics Papers: this item is included in nep-int, nep-mon and nep-opm
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Journal Article: How different are Monetary Unions to national economies according to prices? (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:ucy:cypeua:01-2020

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