Has the Euro increased international price elasticities?
The introduction of the Euro has been accompanied by the hope that international competition between EMU countries would increase due to higher price transparency. This paper contributes to the literature by analysing price elasticities in international trade flows between Germany and France and between Germany and the UK before and after the introduction of the Euro. Using disaggregated Eurostat trade statistics, we adopt a heterogeneous dynamic panel framework for the estimation of price elasticities. We suggest a Kalman-filter approach to control for unobservable quality changes which otherwise would bias estimates of price elasticities. We divide the complete sample, which ranges from 1995 to 2008, into two sub-samples and show that price elasticities in trade between EMU countries did not change substantially after the introduction of the Euro. Hence, we do not find evidence for an increase in international price competition resulting from EMU.