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Price level convergence, purchasing power parity and multiple structural breaks: An application to US cities

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Author Info
Syed A. Basher () (Department of Economic Policies, Qatar Central Bank, Doha, Qatar.)
Josep Lluis Carrión-i-Silvestre () (AQR-IREA, University of Barcelona.)

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Abstract

This article provides a fresh methodological and empirical approach for assessing price level convergence and its relation to purchasing power parity (PPP) using annual price data for seventeen US cities. We suggest a new procedure that can handle a wide range of PPP concepts in the presence of multiple structural breaks using all possible pairs of real exchange rates. To deal with cross-sectional dependence, we use both cross-sectional demeaned data and a parametric bootstrap approach. In general, we find more evidence for stationarity when the parity restriction is not imposed, while imposing parity restriction provides leads toward the rejection of the panel stationar- ity. Our results can be embedded on the view of the Balassa-Samuelson approach, but where the slope of the time trend is allowed to change in the long-run. The median half-life point estimate are found to be lower than the consensus view regardless of the parity restriction.

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Paper provided by Xarxa de Referència en Economia Aplicada (XREAP) in its series Working Papers with number XREAP2008-8.

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Length: 51 pages
Date of creation: Jul 2008
Date of revision: Jul 2008
Handle: RePEc:xrp:wpaper:xreap2008-08

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(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. Basher, Syed A. & Westerlund, Joakim, 2008. "Panel Cointegration and the Monetary Exchange Rate Model," MPRA Paper 10453, University Library of Munich, Germany. [Downloadable!]
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