by Nigel F.B. Allingtona, Paul A. Kattumanb and Florian A. Waldmannc
The introduction of the euro was intended to integrate markets within Europe further, after the implementation of the 1992 Single Market Project. We examine the extent to which this objective has been achieved, by examining the degree of price dispersion between countries in the euro zone, compared to a control group of EU countries outside the euro zone. We also establish the role of exchange rate risk in hampering arbitrage by estimating the euro effect for subgroups within the euro zone, utilizing differences among EU countries in participation in the Exchange Rate Mechanism. Our results, in contrast with previous empirical research, suggest robustly that the euro has had a significant integrating effect.
JEL Codes: E31, E42, F01.
Full article (PDF, 43 pages 348 kb)
a Gonville and Caius College, University of Cambridge, and Cardiff University
b Judge Business School and Corpus Christi College, University of Cambridge
c Citigroup Global Markets, London and Wolfson College, University of Cambridge