The Euro Changeover and Its Effects on Price Transparency and Inflation

Despite the expectations of economists that the euro changeover would have no effect on prices, European consumers perceived the contrary. To shed some light on this puzzle, we develop a model of imperfect information in which cheaper goods experience higher price growth after the changeover. Retailers, aware of the consumers' difficulties in adopting the new currency, use currency changeovers to increase profits by increasing prices. The euro related inflation is higher the lower price transparency after the changeover. Using data on inflation (Eurostat) and price levels (Economist Intelligence Unit) we show that, although the euro changeover did not significantly increase inflation, it had distortionary effect on prices. After the changeover cheaper goods had higher inflation, and this effect was stronger in countries in which people found dealing with the new currency problematic.