A Short History of Price Level Convergence in Europe

We study the evolution of price level dispersion in Europe by combining time-series information on harmonized indices of consumer prices (HICPs) with occasional observations of absolute price levels. We find that European price levels converged over much of the last 40 to 50 years. In the United States, our benchmark, price level dispersion is more or less stable. A back-of-the-envelope calculation suggests that indirect tax rate harmonization, convergence of nontraded input costs, and convergence of traded input costs (in the form of exchange rate stability and increased openness) are all important in explaining European price level convergence.