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Persistence in Law-Of-One-Price Deviations: Evidence from Micro-Data

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Author Info
Mario J. Crucini () (Department of Economics, Vanderbilt University)
Mototsugu Shintani () (Department of Economics, Vanderbilt University)

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Abstract

We study the dynamics of good-by-good real exchange rates using a micro-panel of 270 goods prices drawn from major cities in 63 countries and 258 goods prices drawn from 13 major U.S. cities. We find the half-life of deviations from the Law-of-One-Price for the average good is about 1 year. The average half-life is very similar across the OECD, the LCD and within the U.S., suggesting little in the way of nominal exchange rate regime influences. The average non-traded good has a half-life of 1.9 years compared to 1.2 years for traded-goods, for the OECD, with modest differences elsewhere. Aggregating the micro-data increases persistence in the OECD by 6 months to 1.5 years, well below levels obtained using aggregate CPI data. We attribute these differences to conceptual and methodological factors and argue in favor of increased use of micro-price data in applied theory.

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Paper provided by Department of Economics, Vanderbilt University in its series Working Papers with number 0616.

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Date of creation: Dec 2002
Date of revision: Jul 2006
Handle: RePEc:van:wpaper:0616

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Keywords: Real exchange rates purchasing power parity law of one price dynamic panel

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Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
F31 - International Economics - - International Finance - - - Foreign Exchange
D40 - Microeconomics - - Market Structure and Pricing - - - General

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Shiu-Sheng Chen & Charles Engel, 2004. "Does "Aggregation Bias" Explain the PPP Puzzle?," NBER Working Papers 10304, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Morten O. Ravn & Stephanie Schmitt-Grohe & Martin Uribe, 2006. "Pricing to Habits and the Law of One Price," Economics Working Papers ECO2006/40, European University Institute. [Downloadable!]
    Other versions:
  3. Konstantin Gluschenko, 2004. "Analysing changes in market integration through a cross-sectional test for the law of one price," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(2), pages 135-149. [Downloadable!]
  4. Mario J. Crucini & Mototsugu Shintani, 2002. "Persistence in Law-Of-One-Price Deviations: Evidence from Micro-Data," Working Papers 0222, Department of Economics, Vanderbilt University, revised Jul 2004. [Downloadable!]
    Other versions:
  5. Yuriy Gorodnichenko & Linda Tesar, 2005. "A Re-Examination of the Border Effect," NBER Working Papers 11706, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Mototsugu Shintani, 2003. "A Nonparametric Measure of Convergence Toward Purchasing Power Parity," Levine's Bibliography 506439000000000172, UCLA Department of Economics. [Downloadable!]
    Other versions:
  7. Joseph P. Byrne & Julia Darby & Ronald MacDonald, 2006. "US Trade and Exchange Rate Volatility: A Real Sectoral Bilateral Analysis," Working Papers 2006_9, Department of Economics, University of Glasgow. [Downloadable!]
    Other versions:
  8. Eyal Baharad & Benjamin Eden, 2004. "Price Rigidity and Price Dispersion: Evidence from Micro Data," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(3), pages 613-641, July. [Downloadable!] (restricted)
    Other versions:
  9. Jean Imbs & Haroon Mumtaz & Morten O. Ravn & Hélène Rey, 2005. ""Aggregation Bias" DOES Explain the PPP Puzzle," NBER Working Papers 11607, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  10. Christian Broda & David E. Weinstein, 2008. "Understanding International Price Differences Using Barcode Data," NBER Working Papers 14017, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. Robert Dekle & Hyeok Jeong & Heajin Ryoo, 2006. "A Re-examination of the Exchange Rate Disconnect Puzzle: Evidence from Japanese Firm Level Data," IEPR Working Papers 06.46, Institute of Economic Policy Research (IEPR). [Downloadable!]
  12. Paul R. Bergin & Reuven Glick, 2006. "Global price dispersion: are prices converging or diverging?," Working Paper Series 2006-50, Federal Reserve Bank of San Francisco. [Downloadable!]
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  13. Balázs Égert, 2007. "Real Convergence, Price Level Convergence and Inflation Differentials in Europe," Working Papers 138, Oesterreichische Nationalbank (Austrian Central Bank). [Downloadable!]
    Other versions:
  14. Paul R. Bergin & Reuven Glick, 2005. "Tradability, Productivity, and Understanding International Economic Integration," NBER Working Papers 11637, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  15. Masao Ogaki & Sungwook Park, 2007. "Long-run real exchange rate changes and the properties of the variance of k-differences," Working Papers 07-05, Ohio State University, Department of Economics. [Downloadable!]
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