Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/27254
Authors: 
Dreger, Christian
Kholodilin, Konstantin Arkadievich
Lommatzsch, Kirsten
Slacalek, Jiri
Wozniak, Przemyslaw
Year of Publication: 
2007
Series/Report no.: 
DIW Discussion Papers 730
Abstract: 
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.
Subjects: 
EU enlargement
price convergence
catching up and competition
JEL: 
E31
F15
C33
Document Type: 
Working Paper

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