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

The domestic Balassa–Samuelson effect of inflation for the Greek economy

The goal of this study is to assess whether and to what extent inflation differentials between the tradable and nontradable sectors in the Greek economy are due to the domestic version of the Balassa–Samuelson (BS) effect and, therefore, the ‘expensiveness’ of the country and its huge deficit of international competitiveness. Using data over the period 1989 to 2009 from the Greek economy, the empirical results indicate that the domestic BS effect is present for the case of Greece and seems to explain about 33% of the overall inflation rate.N/

Harrod, Balassa, and Samuelson (re)visit Eastern Europe

In this paper, we investigate the Harrod–Balassa–Samuelson (HBS) hypothesis in 11 Central and Eastern European transition countries. Unlike previous research, we test the HBS hypothesis with NACE 6 quarterly data which enables us to divide data into tradable and nontradable sectors without requiring unrealistic assumptions on the nature of the data. Contrary to previous results, we are only able to find evidence for univariate HBS effects in Bulgaria, Croatia, Hungary, and Poland. However, using panel cointegration tests, we find strong statistical evidence for the HBS hypothesis within countries and across countries. Our results also demonstrate that cross-country HBS holds under the assumption that the law of one price for tradables does not hold. Finally, we find, contrary to theory, that government consumption negatively impacts relative prices. The policy implications are that failing to acknowledge the peculiarities of the transition process results in suboptimal monetary policy