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The Penn Effect within a Country - Evidence from Japan

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  • Yin-Wong Cheung
  • Eiji Fujii

Abstract

To control for product quality and eliminate the exchange rate volatility effect, we use the Japanese regional data to study the Penn effect – the positive relationship between price and income levels. Similarly to what is widely documented with international data, the price and income levels exhibit significant positive association across the Japanese prefectures. Furthermore, the intra-Japan Penn effect is driven essentially by prices of nontradables. The effect is also found stronger among rich prefectures than poor ones, as is the case with the international data. In explaining the Penn effect within Japan, we find that the measures of sectoral productivity do not behave in the way suggested by the Balassa-Samuelson hypothesis. On the other hand, the population density variable that captures the agglomeration effect offers a good explanatory power.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3955.

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Date of creation: 2012
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Handle: RePEc:ces:ceswps:_3955

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Keywords: agglomeration effect; Penn effect; sectoral productivity differential; tradables and non-tradables; population density;

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  1. Glaeser, Edward L., 2008. "Cities, Agglomeration, and Spatial Equilibrium," OUP Catalogue, Oxford University Press, number 9780199290444.
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  16. Shaohua Chen & Martin Ravallion, 2010. "The Developing World Is Poorer Than We Thought, but No Less Successful in the Fight Against Poverty," The Quarterly Journal of Economics, MIT Press, vol. 125(4), pages 1577-1625, November.
  17. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584.
  18. Bergstrand, Jeffrey H, 1991. "Structural Determinants of Real Exchange Rates and National Price Levels: Some Empirical Evidence," American Economic Review, American Economic Association, vol. 81(1), pages 325-34, March.
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