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Price Convergence toward the EU: A Few Open Issues

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Abstract

This article attempts to answer a few open questions related to price convergence in the Czech Republic and in other Central and Eastern European Countries toward prices in the European Union. The authors address the following issues: First, what, from the theoretical viewpoint, should the quantitative relationship be between price level and GDP? Second, does the existing empirical data allow for a clear distinction between tradable and non-tradable commodities, as assumed by standard theory? Third, what is the relationship between price levels and coefficient measuring differences in the structures of relative prices in individual countries? Fourth, what are the likely forms of relative price convergence in the Czech Republic toward accession to the European Union? Fifth, what is the reason for the significantly negative residual of the Czech economy in the cross-country regressions of the average price level on GDP.

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