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Price convergence and geographic dimension of market integration: Evidence from China

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  • Ritola, Maria

    ()
    (BOFIT)

Abstract

This study analyses the level and geographic dimension of China's market integration. The objective is to provide a broad characterization of China's market integration by performing a variety of empirical tests and providing comparisons to other studies on the same topic. The models tested are grounded in the law of one price. Price convergence is analysed with univariate time series methods, where linear and non-linear cointegration models refer to convergence in the short run and in the long run, respectively. The non-linear model is considered a good fit for analysing transitional economies, because the non-linear trend variable in the model indicates whether there is movement towards integration in the long run. Convergence of prices is first analysed by comparing city-level prices with China's national average price level and then by dividing China into three regional clusters. The estimation results suggest that the level of integration across Chinese cities is fairly high by international standards. The great majority of price series trending towards integration are services. The geographic pattern of China's market integration did not turn out as expected. Eastern cities are among the least integrated cities in the nationwide examination. Relatively high levels of integration were detected from several central and south-eastern cities. Furthermore, the cluster convergence approach to analyse China's market integration did not augment the eastern cities' level of convergence.

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Bibliographic Info

Paper provided by Bank of Finland, Institute for Economies in Transition in its series BOFIT Discussion Papers with number 13/2008.

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Length: 37 pages
Date of creation: 27 Aug 2008
Date of revision:
Handle: RePEc:hhs:bofitp:2008_013

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Postal: Bank of Finland, BOFIT, P.O. Box 160, FI-00101 Helsinki, Finland
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Fax: + 358 10 831 2294
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Web page: http://www.suomenpankki.fi/bofit_en/
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Related research

Keywords: China; market integration; law of one price; price dispersion; regional clusters; convergence;

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References

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  1. Charles Engel & John H. Rogers, 1995. "Regional Patterns in the Law of One Price: The Roles of Geography vs. Currencies," NBER Working Papers 5395, National Bureau of Economic Research, Inc.
  2. Gérard Roland, 2004. "Transition and Economics: Politics, Markets, and Firms," MIT Press Books, The MIT Press, edition 1, volume 1, number 026268148x, December.
  3. Janet Ceglowski, 2003. "The law of one price: intranational evidence for Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 36(2), pages 373-400, May.
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  5. Stephen G. Cecchetti & Nelson C. Mark & Robert J. Sonora, 2002. "Price Index Convergence Among United States Cities," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(4), pages 1081-1099, November.
  6. Pinelopi K. Goldberg & Michael M. Knetter, 1996. "Goods Prices and Exchange Rates: What Have We Learned?," NBER Working Papers 5862, National Bureau of Economic Research, Inc.
  7. Bart Hobijn & Philip Hans Franses, 2000. "Asymptotically perfect and relative convergence of productivity," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(1), pages 59-81.
  8. S. Illeris & G. Akehurst, 2002. "Introduction," The Service Industries Journal, Taylor & Francis Journals, vol. 22(1), pages 1-3, January.
  9. Gluschenko, Konstantin, 2006. "Russia’s common market takes shape: Price convergence and market integration among Russian regions," BOFIT Discussion Papers 7/2006, Bank of Finland, Institute for Economies in Transition.
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Cited by:
  1. M. Ege Yazgan & Hakan Yilmazkuday, 2014. "High versus Low Inflation: Implications for Price-Level Convergence," Koç University-TUSIAD Economic Research Forum Working Papers 1412, Koc University-TUSIAD Economic Research Forum.
  2. Herrmann-Pillath, Carsten & Libman, Alexander & Xiaofan, Yu, 2010. "State and market integration in China: A spatial econometrics approach to 'local protectionism'," Frankfurt School - Working Paper Series 137, Frankfurt School of Finance and Management.

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