Does One Currency Mean One Price?

Abstract

European Monetary Union was expected to have many consequences for the economies of participant countries. Theory suggested that through a higher volume of trade and stronger competition in the Eurozone, a single currency would lead to a reduction in price dispersion. As far as prices are concerned, two effects were expected: an immediate effect due to the technical characteristics of the changeover process, and a long-term one leading to price convergence. Both Euro effects are evaluated using difference-in-difference (DD) methodology. DD estimation is commonly used in the evaluation of the effects of policy programmes. Applied to the issue of introducing a single currency, the Euro effects identified are the estimated differences in price changes, price dispersion and convergence rates pre- and post-Euro between two groups of countries: Euro and non-Euro.