On the Long-Run Effect of a Currency Changeover on Prices: The Case of Restaurants

This paper studies the long-run effect of the 2002 changeover in the European Monetary Union on restaurant prices. During the changeover, restaurant prices increased significantly but rather than returning to their pre-changeover trend, restaurant prices appear to have stabilized on a higher path. This stands in contrast to the prediction of menu cost models or models of confusion-induced price increases, as these models can only account for a transitory effect. The persistence of the increase suggests the existence of more than one price equilibrium. The paper suggests a theoretical explanation for the persistent impact.