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American Economic Review Vol. 95 No. 3 2005

Understanding European Real Exchange Rates

Mario J. Crucini1; Chris Telmer2; Marios Zachariadis3

1 Department of Economics, Vanderbilt University, Box 1819, Station B, 415 Calhoun Hall, Nashville, TN 37235. · 2 Carnegie Mellon University Graduate School of Industrial Administration, 350 Posner Hall, Frew and Tech Streets, Pittsburgh, PA 15213, and Universitat Pompeu Fabra. · 3 Department of Economics, University of Cyprus, P.O. Box 20537, 1678 Nicosia, Cyprus, and Department of Economics, Louisiana State University.

Abstract

We study good-by-good deviations from the Law-of-One-Price (LOP) for over 1,800 retail goods and services between all European Union (EU) countries for the years 1975, 1980, 1985, and 1990. We find that for each of these years, after we control for differences in income and value-added tax (VAT) rates, there are roughly as many overpriced goods as there are underpriced goods between any two EU countries. We also find that good-by-good measures of cross-sectional price dispersion are negatively related to the tradeability of the good, and positively related to the share of non-traded inputs required to produce the good. We argue that these observations are consistent with a model in which retail goods are produced by combining a traded input with a non-traded input.

DOI
10.1257/0002828054201332
Volume
95
Issue
3
Pages
724-738
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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