Optimal Price Setting During a Currency Changeover: Theory and Evidence from French Restaurants

Abstract

This paper studies firms' price-setting decision during a currency changeover. Buyers' difficulties with the new nominal price level may create incentives to raise prices temporarily but doing so comes at the risk of damaging a seller's standing as a fair trader. We model firms' trade-off and study under which conditions increasing or decreasing prices is optimal. A difference-in-differences analysis based on micro-data of French restaurants strongly supports the model's predictions. Prices during the 2002 changeover in the European Monetary Union were less likely to rise in larger restaurants, non-tourist restaurants, and when prices were advertised.

Keywords: price setting, changeover, Euro, inflation

JEL Classification: E31, F33, M39