Has the Euro Shrunk the Band? Relative Purchasing Power Parity Convergence in a Currency Union*

Abstract

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.

Purchasing Power Parity under Tourism Price Indices: An Analysis for Euro Area

“…After inspecting heteroscedasticity and nonlinearity, the testing procedures indicate that the real effective exchange rates for the Eurozone as well as for most of other countries in the sample reveal nonstationary characteristics. In addition, results found in the study by Kavkler et al (2016) Valuable support for the PPP process can be found in the works of Macedoni (2021) and Xie et al (2021). Macedoni (2021) evaluates the entry of Cyprus, Malta, Slovakia and Slovenia to the Economic and Monetary Union and estimates the thresholds of the bands of the inaction of the deviations from PPP employing a threshold autoregressive model with monthly disaggregated price indices.…”

“…In addition, results found in the study by Kavkler et al (2016) Valuable support for the PPP process can be found in the works of Macedoni (2021) and Xie et al (2021). Macedoni (2021) evaluates the entry of Cyprus, Malta, Slovakia and Slovenia to the Economic and Monetary Union and estimates the thresholds of the bands of the inaction of the deviations from PPP employing a threshold autoregressive model with monthly disaggregated price indices. Macedoni (2021) demonstrates that admission of the previously mentioned four countries to the Economic and Monetary Union is related to the reduction in the thresholds of the bands of inaction.…”

“…Macedoni (2021) evaluates the entry of Cyprus, Malta, Slovakia and Slovenia to the Economic and Monetary Union and estimates the thresholds of the bands of the inaction of the deviations from PPP employing a threshold autoregressive model with monthly disaggregated price indices. Macedoni (2021) demonstrates that admission of the previously mentioned four countries to the Economic and Monetary Union is related to the reduction in the thresholds of the bands of inaction. The calculations show that the regions without a dominant tendency of adjustment of relative prices for the country pairs that were set up using the Eurozone's official currency have decreased by 17%.…”

Breaking badly: The currency union effect on trade

“…Holding fixed the author, Glick (2017) argues for a Euro effect 25% smaller than GR (2016), while Glick and Rose (2016) (b), which pre-dated GR (2016), found that the impact of CUs on trade is sensitive to the specification. Other recent papers that find a positive impact include Kunroo et al (2016), Camarero et al (2014), Felbermayr et al (2017), Gunnella et al (2015), Gil-Pareja et al (2008), Martínez-Zarzoso and Johannsen (2017), and Rotili et al (2014), while Macedoni (2017) finds evidence consistent with the Euro reducing trade costs.…”