Consumer Price Effects of Joining the European Economic and Monetary Union: Modeling the Post-accession Price Adjustment of Greece

Abstract

This study shows how the Consumer Price Index of Greece is affected by joining the European Economic and Monetary Union. The post-accession price adjustment of Greece is also modeled. The research design employed in the study consists of descriptive statistics, chi-square test and regression analysis. The accession of Greece to the European Economic and Monetary Union (EMU) in 2001 and the introduction of the euro in 2002 were followed by a sharp upward shift of the consumer price level. This increase in consumer price level has given birth to a widely held hypothesis that claims that the accession of Greece to the EMU has caused a structural increase in the consumer price level. In this study this hypothesis is tested and rejected. There was no substantial evidence of such an effect of the aftermath of joining the EMU. However, there was strong evidence of structural breaks in the Greek consumer price equilibrium and of the presence of a non-linear price adjustment model. This study addresses the adjustment behavior of the consumer price level, and finds that the shift in prices after the accession to EMU is normal equilibrium restoring adjustments.