Price Dispersion in Europe: Does the Business Cycle Matter?
24 Pages Posted: 29 Oct 2011
Date Written: March 1, 2011
Abstract
We analyze the effect of the business cycle on price dispersion in Europe. Five decades of price level dispersion data for Europe enable us to distinguish short-term influences from long-term influences like market integration. We find that at the business cycle frequency, price dispersion across EMU member countries over the 1960-2009 period is significantly lower during economic downturns. This confirms on a macroeconomic level the evidence from micro and survey studies that markets become more competitive with falling demand, reducing deviations from the Law of One Price. Our model replicates most of the major drops in price level dispersion during severe economic recessions of the early 1970s, 1980s and 1990s, as well as the small change during the recent financial crisis.
Keywords: economic integration, price level convergence, Law of One Price, EMU, business cycle
JEL Classification: E31, E50, F15, F41
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
By Charles M. Engel and John H. Rogers
-
Perspectives on PPP and Long-Run Real Exchange Rates
By Kenneth Froot and Kenneth Rogoff
-
A Panel Project on Purchasing Power Parity: Mean Reversion within and between Countries
-
Purchasing Power Parity in the Long Run
By Niso Abuaf and Philippe Jorion
-
Convergence to the Law of One Price Without Trade Barriers or Currency Fluctuations
By David C. Parsley and Shang-jin Wei
-
Explaining the Border Effect: The Role of Exchange Rate Variability, Shipping Costs, and Geography
By David C. Parsley and Shang-jin Wei