Arbeitspapier

Price convergence in the enlarged internal market

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 41 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 convergence towards the mean price, 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 and higher inflation. The findings have important implications, as price convergence facilitates the working of common economic policies.

Language
Englisch

Bibliographic citation
Series: DIW Discussion Papers ; No. 730

Classification
Wirtschaft
Price Level; Inflation; Deflation
Economic Integration
Multiple or Simultaneous Equation Models: Panel Data Models; Spatio-temporal Models
Subject
EU enlargement
price convergence
catching up and competition
Inflationsrate
Inflationskonvergenz
Internationaler Preiszusammenhang
EU-Binnenmarkt
EU-Erweiterung
EU-Staaten
EU-Staaten (Osteuropa)

Event
Geistige Schöpfung
(who)
Dreger, Christian
Kholodilin, Konstantin Arkadievich
Lommatzsch, Kirsten
Slacalek, Jiri
Wozniak, Przemyslaw
Event
Veröffentlichung
(who)
Deutsches Institut für Wirtschaftsforschung (DIW)
(where)
Berlin
(when)
2007

Handle
Last update
10.03.2025, 11:41 AM CET

Data provider

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Object type

  • Arbeitspapier

Associated

  • Dreger, Christian
  • Kholodilin, Konstantin Arkadievich
  • Lommatzsch, Kirsten
  • Slacalek, Jiri
  • Wozniak, Przemyslaw
  • Deutsches Institut für Wirtschaftsforschung (DIW)

Time of origin

  • 2007

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