24 Pages Posted: 29 Oct 2011
Date Written: March 1, 2011
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
Hoeberichts, Marco and Stokman, Ad C.J., Price Dispersion in Europe: Does the Business Cycle Matter? (March 1, 2011). De Nederlandsche Bank Working Paper No. 285. Available at SSRN: https://ssrn.com/abstract=1950597 or http://dx.doi.org/10.2139/ssrn.1950597