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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.)

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 stationarity. 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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File URL: http://www.pcb.ub.es/xreap/aplicacio/fitxers/XREAP2008-08.pdf
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File URL: http://www.pcb.ub.es/xreap/aplicacio/fitxers/XREAP2008-08.pdf
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Bibliographic Info

Paper provided by Xarxa de Referència en Economia Aplicada (XREAP) in its series Working Papers with number XREAP2008-08.

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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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Postal: Espai de Recerca en Economia, Facultat de Ciències Econòmiques i Empresarials, Universitat de Barcelona, c/ Tinent Coronel Valenzuela, 1-11, 08034 Barcelona
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Web page: http://www.pcb.ub.edu/xreap
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Cited by:
  1. Basher, Syed A. & Westerlund, Joakim, 2008. "Panel Cointegration and the Monetary Exchange Rate Model," MPRA Paper 10453, University Library of Munich, Germany.
  2. Antonio Manresa & Ferran Sancho, 2012. "Leontief versus Ghosh: two faces of the same coin," Working Papers XREAP2012-18, Xarxa de Referència en Economia Aplicada (XREAP), revised Oct 2012.

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