In Search of a Euro Effect: Big Lessons from a Big Mac Meal?
David C. Parsley
Vanderbilt University – Finance
Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); International Monetary Fund (IMF); Tsinghua University - School of Economics & Management
August 19, 2007
Using highly disaggregated price data of the Big Mac Meal and its ten ingredients from twenty-five European countries since 1993, we investigate two questions related to the effects of the adoption of the Euro on prices. First, was the changeover to the euro accompanied, as many believe, by an increase in prices in member countries? Second, does the adoption of the euro promote goods market arbitrage in the form of a faster speed of convergence to a common price? On the first question, in order to net out global or regional effects on prices not related to the adoption of the euro, we compare the experience of eurozone countries to non-euro European countries in a 'difference-in-differences' specification. We perform statistical tests over different time horizons, and conclude that there is no evidence of significant price increases associated with the adoption of the euro even for food items. On the second question, we examine the trend in price dispersion as well as the persistence of deviations from the law of one price. Once After properly accounting for possible non-linearities, we find little systematic evidence of a significant improvement in goods market integration following the introduction of the euro. On these two questions (at least), there is no euro effect to be found.
Number of Pages in PDF File: 25
Keywords: price dispersion, goods market integration, euro
JEL Classification: F31
Date posted: June 21, 2007
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