Price Convergence in the Enlarged Internal Market

68 Pages Posted: 28 May 2009 Last revised: 18 Sep 2009

See all articles by Christian Dreger

Christian Dreger

European University Viadrina Frankfurt (Oder); IZA Institute of Labor Economics; Chinese Academy of Social Sciences (CASS)

Konstantin A. Kholodilin

German Institute for Economic Research (DIW Berlin)

Kirsten Lommatzsch

German Institute for Economic Research (DIW Berlin)

Jiri Slacalek

European Central Bank (ECB)

Przemyslaw Wozniak

CASE - Center for Social and Economic Research

Date Written: 2007

Abstract

In this paper we investigate the effects of EU enlargement on price convergence. The internal market is expected to boost integration and increase efficiency and welfare through a convergence of prices in product markets. Two principal drivers are crucial to explain price developments. On the one hand, higher competition exerts a downward pressure on prices because of lower mark ups. On the other hand, the catching up process of low income countries leads to a rise in the price levels and higher inflation over a transition period. Using comparative price levels for individual product categories price convergence can be established. However, the speed of convergence is rather slow, with half lives around 10 years. The enlargement has slightly stimulated the convergence process, and this impact is robust across different groups of countries. Moreover, the driving forces of convergence are explored. In line with theoretical predictions, the rise in competition exerts a downward pressure on prices, while catching up of low income countries leads to a rise in price levels.

Keywords: EU enlargement, price convergence, catching up and competition

JEL Classification: E31, F15, C33

Suggested Citation

Dreger, Christian and Kholodilin, Konstantin A. and Lommatzsch, Kirsten and Slacalek, Jiri and Wozniak, Przemyslaw, Price Convergence in the Enlarged Internal Market (2007). CASE Network Reports No. 76, Available at SSRN: https://ssrn.com/abstract=1411144 or http://dx.doi.org/10.2139/ssrn.1411144

Christian Dreger (Contact Author)

European University Viadrina Frankfurt (Oder) ( email )

Frankfurt (Oder)
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Chinese Academy of Social Sciences (CASS) ( email )

Beijing, 100732
China

Konstantin A. Kholodilin

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Kirsten Lommatzsch

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Jiri Slacalek

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Przemyslaw Wozniak

CASE - Center for Social and Economic Research ( email )

Al. Jana Pawła II 61/212
Warsaw, 01-031
Poland

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