Cypriot LOP deviations before and after the Euro
Date
2014Pages
1-30Google Scholar check
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Did Cyprus become more integrated with Europe after adopting the
euro? How did this process affect its prices relative to its European partners? Does the degree of integration relative to European Union (EU)
economies as implied by Cypriot price differences vary across goods?
What can explain this variation in Cypriot price differences? We provide
some answers to these questions using a panel of thousands of good-level
prices before and after the adoption of the euro. Comparing the densities
of law-of-one-price (LOP) deviations for Cyprus relative to other Eurozone (EZ) and non-EZ EU economies before and after it adopted the euro,
informs us about the changing degree of integration of Cyprus with other
EU economies during this important period. We infer that Cyprus (a)
became significantly more integrated with EU economies between 2005
and 2010, and (b) the Cypriot distribution of LOP deviations relative to
these economies shifted to the left. By 2010, the empirical distribution
for Cyprus becomes statistically indistinguishable from that of core EZ
economies like Germany, implying a fast pace of relative price adjustment
for Cyprus during the process of euro adoption and indicative of the high
degree of flexibility characterizing the Cypriot economy.