Contrary to popular belief, the introduction of the euro in 2002 did not result in price increases, even for food items, a Vanderbilt researcher found by comparing prices of a Big Mac meal in 13 European countries using their own currency with 12 who adopted the euro currency.
“After the introduction of the euro, most people intuited what seemed pretty straightforward: Prices would go up,” said David Parsley, a management professor at Vanderbilt’s Owen Graduate School of Management. “People thought, ‘Those “evil” corporations will take the opportunity to gouge us.'”
Studies have shown that a vast majority of Europeans think the euro did cause a price jump. “But it’s not true,” Parsley said.
While the costs of a Big Mac meal did go up, they did so everywhere, not just in those countries that adopted the currency, according to Parsley and his co-investigator in the study, Shang-Jin Wei of the Columbia University Graduate School of Business. “In Search of a Euro Effect: Big Lessons from a Big Mac Meal” is scheduled for publication in a forthcoming Journal of International Money and Finance (Volume 27/2 pp 260-276).
“How can you attribute price increases in Poland, Cyprus and Bucharest to the introduction of the euro? How can you possibly use the increases in euro countries as evidence that the introduction of the euro led to price gouging when prices in non-euro countries went up as well?” Parsley said.
The researchers chose to compare the price of a Big Mac meal because the ingredients and the items included in the package (or in economic terms, the “basket”) are nearly identical no matter where they’re served. Parsley and Wei found in earlier studies that Big Mac meal prices closely correlate with other prices in the economies in which they are available.
Statistical tests for the years following the introduction of the euro showed no evidence of price increases attributable to the adoption of the new currency, according to Parsley and Wei. Other countries should therefore not use the specter of price increases to put off adopting the currency, they suggest.
While there may be other benefits and costs to the adoption of the euro, the authors conclude that “the lack of a significant euro effect on prices suggests that the adoption of a common currency has no significant inflationary consequence and is perhaps not as important as direct trade policies in promoting market integration in Europe.”
Here is a link to the working paper: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=995491.
For more news about Vanderbilt, visit the News Service homepage at www.vanderbilt.edu/news.
Media Contact: Jennifer Johnston (615) 322-NEWS
Jennifer.johnston@vanderbilt.edu