We thank Orley Ashenfelter, Arnaud Costinot, Franco Peracchi, Hélène Rey, Julio Rotemberg, Mike Rothshild, and Matt Weinberg.
The Euro Changeover and Its Effects on Price Transparency and Inflation
Article first published online: 22 JAN 2009
© 2009 The Ohio State University
Journal of Money, Credit and Banking
Volume 41, Issue 1, pages 101–129, February 2009
How to Cite
DZIUDA, W. and MASTROBUONI, G. (2009), The Euro Changeover and Its Effects on Price Transparency and Inflation. Journal of Money, Credit and Banking, 41: 101–129. doi: 10.1111/j.1538-4616.2008.00189.x
- Issue published online: 22 JAN 2009
- Article first published online: 22 JAN 2009
- Received July 18, 2006; and accepted in revised form June 27, 2008.
- currency changeover;
- imperfect information;
- search costs;
- price setting
Despite the expectations of economists that the euro changeover would have no effect on prices, European consumers perceived the opposite. To shed some light on this puzzle, we develop a model of imperfect information in which cheaper goods experience higher price growth after the changeover. Retailers, aware of consumers' difficulties in adopting the new currency, use currency changeovers to increase profits by increasing prices. The lower the price transparency after the changeover, the higher the euro-related inflation. Using data on inflation (Eurostat) and price levels (Economist Intelligence Unit), we show that although the euro changeover did not significantly increase inflation, it nevertheless had a distortionary effect on prices. After the changeover, cheaper goods had higher inflation, and this effect was stronger in countries in which people found dealing with the new currency problematic.