foad_05

Emory University
Department of Economics
Working Papers

Title: Europe Without Borders? The Effect of the EMU on Relative Prices

Number: 05-15

Author: Hisham Foad

Issue Date: April 2005

Abstract: Has the formation of the European Monetary Union reduced the impact of national borders on
cross-border market convergence? This paper extends Engel and Rogers (1996) well known
work on border effects to cities across Western Europe over the period 1995 . 2002 and finds two
key results. First, cross-border relative prices tend to be more volatile than prices between
locations not separated by a border. This result is robust to a variety of potential explanations for
border effects, such as uneven sampling bias, idiosyncratic price shocks, and incomplete
exchange rate-pass through. Turning our attention to cross-border price volatility before and after
the formation of the EMU, the effects vary by country size. Within the EMU, cross-border price
volatility has not changed between the "small" countries, but has fallen significantly between the
large EMU countries. Between the EMU and the UK, cross-border volatility has increased
between the UK and the small EMU countries, but there has been no significant change between
the UK and the large EMU countries. These results are consistent with the fact that exchange
rates are more likely to adjust to price differentials between small countries than between large
countries.

Title:	Europe Without Borders? The Effect of the EMU on Relative Prices
Number:	05-15
Author:	Hisham Foad
Issue Date:	April 2005
Abstract:	Has the formation of the European Monetary Union reduced the impact of national borders on cross-border market convergence? This paper extends Engel and Rogers (1996) well known work on border effects to cities across Western Europe over the period 1995 . 2002 and finds two key results. First, cross-border relative prices tend to be more volatile than prices between locations not separated by a border. This result is robust to a variety of potential explanations for border effects, such as uneven sampling bias, idiosyncratic price shocks, and incomplete exchange rate-pass through. Turning our attention to cross-border price volatility before and after the formation of the EMU, the effects vary by country size. Within the EMU, cross-border price volatility has not changed between the "small" countries, but has fallen significantly between the large EMU countries. Between the EMU and the UK, cross-border volatility has increased between the UK and the small EMU countries, but there has been no significant change between the UK and the large EMU countries. These results are consistent with the fact that exchange rates are more likely to adjust to price differentials between small countries than between large countries.

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