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Convergence to the Law of One Price Without Trade Barriers or Currency Fluctuations

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Author Info
David C. Parsley
Shang-Jin Wei

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Abstract

Using a panel of 51 prices from 48 cities in the United States we provide an upper bound estimate of the rate of convergence to Purchasing Power Parity. We find convergence rates substantially higher than typically found in cross-country data. We investigate some potentially serious biases induced by i.i.d. measurement errors in the data, and find our estimates to be robust to these potential biases. We also present evidence that convergence occurs faster for larger price differences. Finally, we find that rates of convergence are slower for cities farther apart. However, our estimates suggest that distance alone can only account for a small portion of the much slower convergence rates across national borders.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5654.

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Date of creation: Jul 1996
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Handle: RePEc:nbr:nberwo:5654

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  1. Charles Engel & John H. Rogers, 1994. "How Wide is the Border?," NBER Working Papers 4829, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Froot, Kenneth A. & Kim, Michael & Rogoff, Kenneth, 1995. "The Law of One Price Over 700 Years," Working Papers 95-13, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
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  3. Rogers, John H. & Jenkins, Michael, 1995. "Haircuts or hysteresis? Sources of movements in real exchange rates," Journal of International Economics, Elsevier, vol. 38(3-4), pages 339-360, May. [Downloadable!] (restricted)
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  4. Richardson, J. David, 1978. "Some empirical evidence on commodity arbitrage and the law of one price," Journal of International Economics, Elsevier, vol. 8(2), pages 341-351, May. [Downloadable!] (restricted)
  5. Abuaf, Niso & Jorion, Philippe, 1990. " Purchasing Power Parity in the Long Run," Journal of Finance, American Finance Association, vol. 45(1), pages 157-74, March. [Downloadable!] (restricted)
  6. Froot, Kenneth A. & Rogoff, Kenneth, 1995. "Perspectives on PPP and long-run real exchange rates," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 32, pages 1647-1688 Elsevier. [Downloadable!] (restricted)
  7. Jeffrey A. Frankel, 1985. "International capital mobility and crowding-out in the U.S. economy: imperfect integration of financial markets or of goods markets?," Proceedings, Federal Reserve Bank of St. Louis, pages 33-74.
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  8. Andrew Levin & Chien-Fu Lin, 1992. "Unit Root Tests in Panel Data: Asymptotic and Finite-Sample Properties," University of California at San Diego, Economics Working Paper Series 92-23, Department of Economics, UC San Diego. [Downloadable!]
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  9. Fisher, Eric O'N & Park, Joon Y, 1991. "Testing Purchasing Power Parity under the Null Hypothesis of Co-integration," Economic Journal, Royal Economic Society, vol. 101(409), pages 1476-84, November. [Downloadable!] (restricted)
  10. Lothian, James R & Taylor, Mark P, 1996. "Real Exchange Rate Behavior: The Recent Float from the Perspective of the Past Two Centuries," Journal of Political Economy, University of Chicago Press, vol. 104(3), pages 488-509, June. [Downloadable!] (restricted)
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