One Market, One Money, One Price - IJCB - December 2005.pdf

One Market, One Money, One Price?∗ Nigel F.B. Allington,a Paul A. Kattuman,b and Florian A. Waldmannc a Gonville and Caius College, University of Cambridge, and Cardiff University bJudge Business School and Corpus Christi College, University of Cambridge c Citigroup Global Markets, London and Wolfson College, University of Cambridge The introduction of the euro was intended to integrate mar- kets within Europe further, after the implementation of the 1992 Single Market Project. We examine the extent to which this objective has been achieved, by examining the degree of price dispersion between countries in the euro zone, compared to a control group of EU countries outside the euro zone. We also establish the role of exchange rate risk in hampering ar- bitrage by estimating the euro effect for subgroups within the euro zone, utilizing differences among EU countries in partici- pation in the Exchange Rate Mechanism. Our results, in con- trast with previous empirical research, suggest robustly that the euro has had a significant integrating effect. JEL Codes: E31, E42, F01. Over the past two decades, markets within the European Union (EU) have become progressively more integrated as internal barri- ers to trade have been dismantled. Two crucial steps in this process were the completion of the Single Market Project in 1992 and the start of Economic and Monetary Union (EMU) in 1999. The first removed the remaining physical, administrative, and technical bar- riers to integration and stimulated competition. The second intro- duced a common currency and eliminated exchange rate variations ∗We ar