Economic Integration and the Exchange Rate Regime: How Damaging are Currency Crises?
74 Pages Posted: 8 Mar 2004
Date Written: October 2003
We use consumer price data for 205 cities/regions in 21 ountries to study deviations from the law-of-one-price before, during and after the major currency crises of the 1990s. We combine data from industrialised nations in North America (Unites States, Canada, Mexico), Europe (Germany, Italy, Spain and Portugal) and Asia (Japan, Korea, New Zealand, Australia) with corresponding data from emerging market economies in the South America (Argentine, Bolivia, Brazil, Columbia) and Asia (India, Indonesia, Malaysia, Philippines, Taiwan, Thailand). We confirm previous results that both distance and border explain a significant amount of relative price variation across different locations. We also find that currency attacks had major disintegration effects by significantly increasing these border effects, and by raising within country relative price dispersion in emerging market economies. These effects are found to be quite persistent since relative price volatility across emerging markets today is still significantly larger than a decade ago.
Keywords: relative price volatility, spatial data, real exchange rate, law of one price, purchasing power parity, currency crisis, contagion, economic integration
JEL Classification: F40, F41
Suggested Citation: Suggested Citation