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CURRENCY ARRANGEMENTS AND GOODS MARKET INTEGRATION: A PRICE BASED APPROACH

David Parsley Shang-Jin Wei
Authors registered in the RePEc Author Service: Shang-Jin Wei and David Parsley ()

International Finance from University Library of Munich, Germany

Abstract: Recent studies of the effect of currency arrangements on goods market integration (starting with Rose, 2000) employ a methodology based on volumes of trade. However, the connection between market integration and trade flows can be loose. In this paper, we adopt a different methodology that uses a 3-dimensional panel of prices of 95 very disaggregated goods (e.g., light bulbs) in 83 cities around the world from 1990 to 2000. We find that the impact of an institutionalized stabilization of the exchange rate, i.e., a currency board or a currency union, generally provides a stimulus to goods market integration that goes far beyond reducing exchange rate volatility to zero. However, there are important exceptions. Among the institutional arrangements, long-term currency unions demonstrate greater integration than more recent currency boards. All of them can improve their integration further relative to a U.S. benchmark.

Keywords: goods market integration; band of deviations from Law of One Price (search for similar items in EconPapers)
JEL-codes: F3 F2 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-net
Date: 2002-11-11
Note: Type of Document - pdf; prepared on IBM PC - PC-TEX/UNIX Sparc TeX; to print on HP/PostScript/Franciscan monk; pages: 46; figures: included/request from author/draw your own
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