Currency Unions, Product Introductions, and the Real Exchange Rate

Abstract

We use a novel dataset of online prices of identical goods sold by four large global retailers in dozens of countries to study good-level real exchange rates and their aggregated behavior. First, in contrast to the prior literature, we demonstrate that the law of one price holds very well within currency unions for tens of thousands of goods sold by each of the retailers, implying good-level real exchange rates often equal to one. Prices of these same goods exhibit large deviations from the law of one price outside of currency unions, even when the nominal exchange rate is pegged. This clarifies that the common currency per se, and not simply the lack of nominal volatility, is important in reducing cross-country price dispersion. Second, we derive a new decomposition that shows that good-level real exchange rates in our data predominantly reflect differences in prices at the time products are first introduced, as opposed to the component emerging from heterogeneous passthrough or from nominal rigidities during the life of the good. Further, these international relative prices measured at the time of introduction move together with the nominal exchange rate. This stands in sharp contrast to pricing behavior in models where all price rigidity for any given good is due simply to costly price adjustment for that good.

Are Online and Offline Prices Similar? Evidence from Large Multi-Channel Retailers

“…One possibility is that retailers are worried about antagonizing customers who can now easily compare prices online through the web or their mobile phones. This might even be affecting cross-country pricing, as suggested by Cavallo, Neiman, and Rigobon (2014), where we found evidence that global firms such as Apple and IKEA tend to price identically in countries that use the same currency, where it is trivial for consumers to compare prices across borders.…”

A Disaggregated Analysis of Product Price Integration in the Southern African Development Community

“…Furthermore, they may be subject to non-tariff barriers (NTBs) that inhibit arbitrage between countries. 14 In support of this view, Versailles (2012) shows empirically that markets for fruits and vegetables are less integrated in the EAC in comparison to staple foods, and that NTBs are more important for these products compared to staple foods, other food items and other products (such as beer, soda, cigarettes, charcoal and petrol). Similarly, Edwards and Rankin (2012) observe large deviations in retail prices from the regional average for fresh fruit and vegetables for their sample of SSA cities.…”

The International Price System

“…29 As for price changes at the time of product substitutions Cavallo et al (2014) provide evidence using a novel dataset of online prices of identical goods sold by four large global retailers in dozens of countries. They document that even at the time of product introduction there are large deviations in prices across countries that do not use the same currency.…”