Understanding European Real Exchange Rates

Abstract

We study good-by-good deviations from the Law-of-One-Price for over 5,000 goods and services between European Union countries for the years 1975, 1980, 1985 and 1990. We …nd that between most countries there are roughly as many overpriced goods as there are underpriced goods. Equally-weighted and CPI-weighted averages of good-by-good relative prices generate relatively accurate predictions of most nominal cross-rates, as purchasing power parity (PPP) would suggest. These …ndings are robust across years, in spite of relatively large movements in nominal exchange rates. Variation around the averages is large but is found to be related to economically meaningful characteristics of goods such as international tradeability, non-tradedness of factors of production and the competitive structure of the markets in which the goods are sold. Using data on product brands, we …nd that product heterogeneity is at least as important as geography in explaining relative price dispersion. Overall, our data provide strong evidence that international goods markets are segmented, but (i) the evidence relies on absolute deviations from the Law-of-One-Price, not deviations from PPP, (ii) some markets are much more segmented than others, with the distinctions being consistent with economic theory.

Constant versus variable markups: Implications for the law of one price

“…Such a strategy brings two restrictions (both of which are consistent, at least, do not contradict) with the model: (i) the sum of residuals is zero; (ii) residuals are orthogonal to destination-and-good-…xed e¤ects, source-and-good-…xed e¤ects, price data, and distance data (i.e., the border costs will capture the pattern of trade that cannot be explained by any of these variables). 11 This completes the identi…cation of the price components in Equation 15.…”

“…We will consider both the mean and the variance of the deviations from LOP (as in Crucini et al, 2005); while the mean is important to understand the magnitude of the deviations, the variance is the common measure of price dispersion in the literature. One di¤erence is that we will consider the absolute value of relative-price expressions by multiplying all negative relative-price values (and the corresponding right-hand-side variables) with 1; such a strategy is important in measuring the actual (absolute value of) deviations from LOP.…”

International price differences in ski lift tickets

“…The percentage difference is simply obtained by [exp( k ) 1] 100, where k AT or FR. Note the price differential only gives an indication of the so called approximate absolute law of one price since no two ski areas are exactly identical even when a large number of characteristics are controlled for (Crucini, Telmer and Zachariadis, 2005;Broda and Weinstein, 2008). The partial derivative of the price equation with respect to ski area's characteristics gives the implicit marginal price of that characteristic.…”

“…Furthermore, this paper contributes to the increasing literature on international comparisons of price levels based on micro-data for a bundle of products and services (Broda and Weinstein, 2008;Crucini, Telmer and Zachariadis, 2005;Li, Gopinath, Gourinchas and Hsieh, 2010;Parsley and Wei, 2001). Other micro-level studies focus on specific products, such as televisions (Imbs, Mumtaz, Ravn and Rey, 2010) and books (Cabolis, Clerides, Ioannou and Senft, 2007).…”

A Reappraisal of the Border Effect on Relative Price Volatility

“…The volatile-exchange-rate-cum-sticky-price consideration is, nonetheless, found to explain much less than half of the border effect. The border effect research has been extended in different directions in recent studies, including Engel & Rogers (2000, 2001a, 2001b, Parsley & Wei (2001), Depken & Sonora (2002), Ceglowski (2003), Cheung & Fujii (2005), and Crucini et al (2005). 1 The fact that a rather large proportion of the border effect is still unaccounted for remains a puzzle.…”