Currency Changeover and Price Flexibility: An Economic Analysis
This study analyzes businesses' pricing strategies during the euro adoption process in several European countries, providing evidence on how firms adjust their prices as monetary changes approach. Through a nonstationary menu-cost model, it demonstrates that frequency and size of adjustments reflect both expectations and the need to adapt to new economic conditions.
Economists Fernando E. Alvarez, David Argente, Alberto Cavallo, and Francesco Lippi investigate the theories of price rigidity by analyzing how businesses adjust their prices during significant monetary changes, such as the euro adoption in countries like Austria, Finland, Greece, Slovakia, Croatia, and Bulgaria. Through a nonstationary menu-cost model, they demonstrate that firms anticipate the changeover date and may combine adopting the new currency with real price adjustments. The results reflect both expectations and the need to adapt to new economic conditions. According to historical Consumer Price Index (CPI) data from these countries, as well as recent daily price measures, the study confirms that as the monetary change approaches, firms increase adjustment frequency but reduce the size of those adjustments, resulting in a compression of price change distributions. This work significantly contributes to our understanding of price behavior in economically unstable markets, offering a model that encompasses both nominal and real price flexibility. Source: NBER Working Papers
Source: NBER Working Papers