The Price Impact of Joining a Currency Union: Evidence from Latvia

Alberto  Cavallo; Brent  Neiman; Roberto  Rigobon

Article | IMF Economic Review

The Price Impact of Joining a Currency Union: Evidence from Latvia

by Alberto Cavallo, Brent Neiman and Roberto Rigobon

Abstract

Does membership in a currency union matter for a country’s international relative prices? The answer to this question is critical for thinking about the implications of joining (or exiting) a common currency area. This paper is the first to use high-frequency good-level data to provide evidence that the answer is yes, at least for an important subset of consumption goods. We consider the case of Latvia, which recently dropped its pegged exchange rate and joined the euro zone. We analyze the prices of thousands of differentiated goods sold by Zara, the world’s largest clothing retailer. Price dispersion between Latvia and euro zone countries collapsed swiftly following entry to the euro. The percentage of goods with nearly identical prices in Latvia and Germany increased from 6 percent to 89 percent. The median size of price differentials declined from 7 percent to zero. If a large number of firms also behave this way, these results suggest that membership in a currency union has significant implications for a country’s real exchange rate.

Keywords: currency union; exchange rate; Law of one price; Currency Exchange Rate; Price; Latvia;

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Citation:

Cavallo, Alberto, Brent Neiman, and Roberto Rigobon. "The Price Impact of Joining a Currency Union: Evidence from Latvia." IMF Economic Review 63, no. 2 (September 2015): 281–297.

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This dataset contains the raw data files with micro-level prices.
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Case | HBS Case Collection | May 2020 (Revised June 2020)

The Coronavirus (COVID-19) Pandemic and the Global Economy (A)

Alberto Cavallo and Christian Godwin

In April 2020, the world struggled to contain the exponential escalation of the coronavirus (COVID-19) pandemic. Dozens of countries had imposed restrictions on travel, work, and social gatherings. A large share of the global population was under lockdowns and unprecedented supply and demand disruptions crippled the economy. In response, central banks announced massive lending programs to avoid a financial meltdown, and governments were launching unprecedented fiscal packages designed to contain the collapse. In a matter of weeks, the pandemic turned into one of the worst global economic crises since the Great Depression. As governments struggled to make policy decisions, uncertainty and tensions were rising. How to balance the public health and economic concerns? What would be the economic and political consequences of the policy response? Was this the end of globalization, or the beginning of a new era of international cooperation? The only certainty was that some of the hardest choices still lay ahead.

Keywords: Demand and Consumers; Supply and Industry; Finance; Central Banking; Financial Markets; International Finance; Globalization; Government and Politics; Health Pandemics; Decision Making; Macroeconomics; Employment; Crisis Management; Supply Chain; Risk and Uncertainty; Air Transportation Industry; Banking Industry; Consumer Products Industry; Employment Industry; Financial Services Industry; Food and Beverage Industry; Health Industry; Medical Devices and Supplies Industry; Pharmaceutical Industry; Public Administration Industry; Retail Industry; Service Industry; Shipping Industry; Tourism Industry; Travel Industry; Asia; China; Europe; Latin America; Africa; United States;

Citation:

Cavallo, Alberto, and Christian Godwin. "The Coronavirus (COVID-19) Pandemic and the Global Economy (A)." Harvard Business School Case 720-031, May 2020. (Revised June 2020.) View Details

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The Covid-19 Pandemic has led to changes in consumer expenditure patterns that can introduce significant bias in the measurement of CPI inflation. I use data collected from credit and debit transactions in the US to update the official basket weights. I find that the Covid inflation rate is higher for both headline and core CPIs, particularly for low-income households. I find similar results in 12 of 17 additional countries. The difference is growing over time as consumers spend relatively more on food and categories with rising inflation, and relatively less on transportation and categories experiencing significant deflation.

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The Price Impact of Joining a Currency Union: Evidence from Latvia

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