VoxEU.org | August 22, 2014
What happens to prices when a country joins a currency union? And do prices behave differently in pegged exchange rate regimes compared to common currency areas? The answer to this question is a critical input to a country’s choice of currency regime.
History has, however, afforded few opportunities to study empirically such transitions. A number of papers examined this question in the context of the Eurozone’s formation, with mixed results. For example, Goldberg and Verboven (2005) associated the euro with price convergence in a study of Eurozone auto prices, whereas Engel and Rogers (2004) and Parsley and Wei (2008) studied different data sets and concluded the Eurozone did not reduce price dispersion between its member economies. Latvia’s recent entry to the Eurozone from a regime pegged to it offers a helpful case study to examine the impact of currency regimes on pricing behaviour and to try to answer these questions.
