Understanding Law-of-One-Price Deviations across Europe Before and After the Euro∗

We use a panel of thousands of good-level prices before and after the euro in order to compare the determinants and understand the evolution of goods price dispersion across Europe during these two periods. We find that tradeability and non-traded inputs play a significantly smaller role for cross-country price dispersion after the adoption of the euro, and for Eurozone (EZ) economies as compared to the broader group of European Union (EU) economies. We then compare the overall and country-level distributions of law-of-one-price (LOP) deviations at the early and late part of our sample to inform us about the degree of integration across European economies before and after the euro. Our tests reveal that the distributions after the euro are typically significantly different than those before, consistent with a greater degree of integration. Utilizing our panel to trace the location of individual goods in the distribution of LOP deviations, we ask how the price advantage or disadvantage evident in these price distributions evolves over time, and whether goods characteristics play a role for the persistence of these LOP deviations. LOP deviations for these goods are highly correlated, on average, over five or ten year horizons, but much less so over twenty-year or longer horizons. Thes