PRICE SETTING BEHAVIOUR AND PRICE SETTING REGULATIONS AT THE EURO CHANGEOVER Thomas A. Eife*   Working Papers of Eesti Pank No 6, 2006

This paper documents that the impact of the euro changeover in January 2002 on prices was not uniform across the 12 participating countries. There are countries where prices increased significantly, but there are also countries where price-setting behaviour during the changeover does not appear to be very different from other points in time. This paper argues that the above difference can be explained by looking at the way countries regulated price setting during the changeover, and that any impact of the changeover could have been avoided with appropriate regulations. The gap between the actual and the perceived impact is addressed and policy recommendations for future changeovers are provided.
JEL Code: E31, E60, L11
Key words: currency changeover, euro, economic policy, prices, perceived inflation

* Parts of this paper were written while I was visiting the Estonian Central Bank. I am very grateful for their support and such an excellent research environment.

Author's e-mail address: thomas.eife@awi.uni-heidelberg.de

The views expressed are those of the author and do not necessarily represent the official views of Eesti Pank.

Contents

1. Introduction

2. Literature review

3. Factors affecting prices during a changeover

3.1. Two central forces

3.2. Predicting the impact on prices

3.3. Other factors affecting prices

4. Estimating the impact of the changeover

4.1. Measuring the impact

4.2. Estimation results

4.3. Discussion of the impact measure and sensitivity analysis

5. Discussion and policy implications

5.1. Making dual pricing mandatory

5.2. Policy implications

6. Digression: the perceived impact

6.1. Literature

6.2. A communication crisis

6.3. Lessons for future changeovers

6.3.1. Euro observatories

6.3.2. Pre-changeover communication

6.3.3. Post-changeover communication

7. Summary

References

Price Setting Behaviour and Price Setting Regulations at the Euro Changeover, Working Papers of Eesti Pank No 6, 2006 (PDF*)

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