Price Level Convergence, Relative Prices, and Inflation in Europe

By J. Rogers. 2001

172 citations recorded by the source corpus.

If price levels are initially different across the euro area, convergence to a common level of prices would imply that inflation will be higher in countries where prices are initially low. Price level convergence thus provides a potential explanation for recent cross-country differences in European inflation, a worrisome development under the ECBs "one-size-fits-all" monetary policy. I present direct evidence on price level convergence in Europe, using a unique data set, and then investigate how much of the recent divergence of national inflation rates can be explained by price level convergence. I show that between 1990 and 1999 prices did become less dispersed in the euro area. Convergence is especially evident for traded goods, and more in the first half of the 1990s than the second half. By some measures, traded goods price dispersion across the euro area is now close to that across U.S. cities. Despite an on-going process of convergence, deviations from the law of one price are large. Finally, I find a statistically-significant and robust negative relationship between the 1999 price level and 2000 inflation rate in Europe, and that the contribution of price level convergence to explaining inflation differentials is often quite important economically. Still, factors other than price convergence explain most of the cross-country inflation differences.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/cf54dfdd34683de34e7a251ef37b44053417a8a0

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Citations in the corpus

The Law of One Price: Evidence from the Transitional Economy of China (2006, background): “A very partial list of some recent contributions to this focus includes Parsley and Wei (1996), Engel and Rogers (2001), Rogers (2001), Cecchetti, Mark, and Sonora (2002), Ceglowski (2003), and Goldberg and Verboven (2005).”
Constructing Price Indexes across Space and Time: The Case of the European Union (2004, methodology): “Our finding of slight price level convergence in Table 5 is consistent with Rogers (2001). Rogers computes price level indexes for 18 countries (including all members of the European Union) in 1990, 1995 and 1999 using a data set constructed by combining price data from the Economist Intelligence Un”
Price Index Convergence among United States Cities (2002, background): “In a recent article, Rogers (2001) reports that the cross-sectional volatility of relative prices across European countries declined between 1990 and 1999, yielding evidence that such a transition may already have occurred.”
Quantifying the Trade and Economic Effects of Non-Tariff Measures (2006, methodology): “22 It has also been used to examine the related question of the slowness of exchange rate movements in reducing deviations from purchasing power parity (PPP) by Rogers (2000, 2002) and Parsley and Wei (2001).”
To what extent will the banking industry be globalized? A study of bank nationality and reach in 20 European nations (2002, background): “Prices in EU nations have been found to continue to converge after EMU, but at a slower rate than in the early 1990s (Rogers 2001).”