How Wide are European Borders? New Evidence on the Integration Effects of Monetary Unions
41 Pages Posted: 25 May 2003
Date Written: January 2001
We use consumer price data for 81 European cities (in Germany, Austria, Switzerland, Italy, Spain and Portugal) to study deviations from the law-of-one-price before and during the European Economic and Monetary Union (EMU) by analysing both aggregate and disaggregate CPI data for 7 categories of goods we find that the distance between cities explains a significant amount of the variation in the prices of similar goods in different locations. We also find that the variation of the relative price is much higher for two cities located in different countries than for two equidistant cities in the same country. Under EMU, the elimination of nominal exchange rate volatility has largely reduced these border effects, but distance and border still matter for intra-European relative price volatility.
Keywords: relative price volatility, spatial data, real exchange rate, law of one price, purchasing power parity, stationarity, panel unit root test
JEL Classification: F40, F41
Suggested Citation: Suggested Citation