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Has the Euro Shrunk the Band? Relative Purchasing Power Parity Convergence in a Currency Union *
Author(s) -
Macedoni Luca
Publication year - 2021
Publication title -
the scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/sjoe.12417
Subject(s) - purchasing power parity , relative purchasing power parity , economics , convergence (economics) , relative price , international economics , monetary economics , european union , currency , common currency , transaction cost , european monetary union , currency union , econometrics , macroeconomics , exchange rate , monetary policy , microeconomics
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.