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Price level co-movements within Preferential Trade Agreements (PTAs)

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  • Whitten, Gregory

Abstract

This paper tests for a common stochastic trend among the price levels of a PTA's member countries by testing for cointegration among these price levels (proxied here with the log of the CPI for each country as measured in the IMF's International Financial Statistics). This paper uses the trace statistic test to examine if a cointegrating vector exists for the price indices of signatories to a PTA. The cointegrating vector indicates that the (presumably non-stationary) price levels of the member countries possess a long-run stationary mean. Finding a cointegrating vector for the price levels of the countries in the PTA implies that these price levels grow together. However, this finding alone does not indicate that cointegration is a feature unique to PTAs. A country adhering to a PTA may be an exceptionally open country whose price level is affected easily by other countries, whether or not the other countries and the country in question belong to an PTA. A control group is required to test whether or not the price dynamics in PTA members possess distinguishing characteristics. The next part of the paper provides such a control group. The second part tests for cointegration among all country pairs that comprise the PTA (bilateral analysis). This conceptualization permits the creation of a control group. If the treatment group consists of an PTA defined by a series of country pairs where both countries belong to the PTA, then consider the following to be a control group for any given PTA: the set of all country pairs where exactly one country belongs to the PTA in question and exactly one country does not belong to the PTA in question. Call this last set of pairs a "partial" or "pseudo" PTA. Comparing the share of country pairs exhibiting cointegration in the true PTA with the share of country pairs exhibiting cointegration in the pseudo PTA provides a control group against which to gauge the extent of cointegration within the PTA as "high" or not.

Suggested Citation

  • Whitten, Gregory, 2015. "Price level co-movements within Preferential Trade Agreements (PTAs)," Conference papers 332616, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    • Handle: RePEc:ags:pugtwp:332616
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