A study of the potential effects of the conversion to euro

Abstract

Early research work confirms that the use of the new European currency, the euro, could create an effect of money illusion: expressed in euros, perceived prices seem lower and price elasticity diminished. But it also concludes on the complexity of the relationship between prices, currency unit and behavior as the money illusion effect can either increase or decrease demand for specific brands. Tests the assumption that the size of the money illusion could vary by country and is positively related to the level of the conversion rate. Applies the Gabor and Granger method to the price of an item of domestic equipment in two countries, one with a big conversion rate (Spain), and one with a small conversion rate (Germany). Observes a money illusion effect with an increase in intention to buy when the prices are expressed in euros in Germany but, as this effect is not observed in Spain, concludes that a positive relationship between money illusion and conversion rate cannot be accepted and proposes alternative hypotheses, such as the difficulty of the conversion.