Price convergence in the European Union and in the New Member States

Abstract

This paper examines price dispersion in the European Union (EU15) and in three New Member States (Poland, Hungary and the Czech Republic) between 1995 and 2006. The research is motivated by the fact that the price convergence problem is at the top of the public agenda in many New Member States (NMS). The analysis utilizes both disaggregate and aggregate price data, including the prices of 157 products and two indices constructed using two different weighting procedures. For each category of goods the price dispersion is lower in EU15 than EU15 plus 3 NMS. Sigma convergence measured as a decline in the standard deviation over time is rejected. Unit root tests reject the validity of the Law of One Price (LOOP) for most of the estimations of indices but confirm the LOOP for individual goods. The half-lives are shorter for NMS than for the EU15.price convergence, international price dispersion, law of one price