nr 034- Price Convergence in Europe from a Macro Perspective: Product Categories and Reliability

In an earlier study of ours, we provided evidence of consumer price level convergence in Europe, particularly in the 1960s and the 1990s (Faber and Stokman, 2004). The analysis was based on transformations of country HICP indices into absolute price levels, by combining time series HICP data back to 1960 with nominal figures of HICP for one particular benchmark year (1999). In this paper, we demonstrate that this simple procedure delivers reliable estimates of absolute price levels both for short and longer time spans. We adopt this methodology to analyse price dispersion at the onedigit level of HICP in the former EU-15 member states (1980-2003). We find strong price level convergence for most of the product groups in the early 1990s. However, price dispersion levels for tradable products are still much smaller than for non-tradable products. Compared to the US, the dispersion level of consumer prices has always been higher in the euro area, but EMU is narrowing the gap. Price dispersion within the smaller DM-zone is below American levels. Key words: Economic integration, Price level convergence, HICP product groups, EMU JEL Classification: E31, E50, F15, F40