Price Level Convergence within the Euro Area: How Europe Caught Up with the US and Lost Terrain Again

21 Pages Posted: 27 Jan 2016

See all articles by Marco Hoeberichts

Marco Hoeberichts

De Nederlandsche Bank - Research Department

Ad C.J. Stokman

De Nederlandsche Bank - Research Department

Date Written: January 18, 2016

Abstract

Persistent price differences across euro area countries are an indication of incomplete economic integration. We analyze long and short run developments of price level dispersion in the euro area and compare the results with the situation in the US. We find that monetary and economic integration in Europe has been successful in establishing a major downward trend in price level differences across countries since 1960. In 2007, price level dispersion in the euro area was at the same level as in the US. After the financial crisis, dispersion first continued its downward trend before diverging economic conditions across euro area countries contributed to a widening of price level differences again. Short-run dynamics show that price dispersion in Europe deviates more from the long-term equilibrium than in the US, although deviations have become smaller since EMU.

Keywords: economic integration, price-level convergence, law of one price, EMU, US

JEL Classification: E31, E37, F15

Suggested Citation

Hoeberichts, Marco M. and Stokman, Ad C.J., Price Level Convergence within the Euro Area: How Europe Caught Up with the US and Lost Terrain Again (January 18, 2016). De Nederlandsche Bank Working Paper No. 497. Available at SSRN: https://ssrn.com/abstract=2723363 or http://dx.doi.org/10.2139/ssrn.2723363

Marco M. Hoeberichts (Contact Author)

De Nederlandsche Bank - Research Department ( email )

P.O. Box 98
1000 AB Amsterdam
Netherlands
+31-20-524 2890 (Phone)
+31-20-524 2529 (Fax)

Ad C.J. Stokman

De Nederlandsche Bank - Research Department ( email )

P.O. Box 98
1000 AB Amsterdam
Netherlands

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