Department of Economics and Business Economics

Has the Euro Shrunk the Band? Relative Purchasing Power Parity Convergence in a Currency Union

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DOI

I study the effects of entry to the European Monetary Union (EMU) on relative purchasing power parity (PPP) convergence using monthly disaggregated price indices from 32 European countries from 1999 to 2016. I examine the entry of Cyprus, Malta, Slovakia, and Slovenia to the EMU, and I estimate the bands of inaction of relative prices before and after entry using a threshold autoregressive model. I find a positive effect of the EMU on relative PPP convergence: after entry, the bands of inaction with EMU members fell by 17 percent. Cross‐sectional evidence supports the theoretical prediction that bands of inaction are related to transaction costs.
Original languageEnglish
JournalThe Scandinavian Journal of Economics
Volume123
Issue2
Pages (from-to)593-620
Number of pages28
ISSN0347-0520
DOIs
Publication statusPublished - Apr 2021

    Research areas

  • ADJUSTMENT, ARBITRAGE, Arbitrage, COUNTRY PRICE DISPERSION, GRAVITY, INCREASES, LAW, LEVEL CONVERGENCE, MARKET INTEGRATION, THRESHOLD AUTOREGRESSION, TRADE, currency union, euro, relative PPP convergence, threshold autoregressive model

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