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Does the law of one price hold in China? Testing price convergence using disaggregated data

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  • LAN, Yuexing
  • SYLWESTER, Kevin

Abstract

This study examines to what extent prices diverge across China and how long it takes prices to converge following idiosyncratic shocks. We consider monthly data using disaggregated goods prices from 36 cities in China. Following [Imbs, J., Mumtaz, H., Ravn, M., and Rey, H., 2005. PPP strikes back: aggregation and the real exchange rate. Quarterly Journal of Economics 120, 1-44.], we use two estimation methods: a fixed effect method when considering goods individually and a mean group estimation specification for a panel including all goods simultaneously. The mean group method also accounts for dynamic heterogeneity across goods. Impulse response functions are obtained to calculate half-lives. With both methods, we find half-lives of only a few months or less, supporting the conjecture that convergence rates within a country are faster than rates estimated in an international context. However, the half-life reported here is still shorter than that for other studies using disaggregated intracountry data. Perhaps a lower degree of specialization and market differentiation in developing countries creates a greater potential for price convergence.

Suggested Citation

  • LAN, Yuexing & SYLWESTER, Kevin, 2010. "Does the law of one price hold in China? Testing price convergence using disaggregated data," China Economic Review, Elsevier, vol. 21(2), pages 224-236, June.
  • Handle: RePEc:eee:chieco:v:21:y:2010:i:2:p:224-236
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    Cited by:

    1. M. Ege Yazgan & Hakan Yilmazkuday, 2016. "High versus low inflation: implications for price-level convergence," Empirical Economics, Springer, vol. 50(4), pages 1527-1563, June.
    2. Li, Chao & Gibson, John, 2013. "Rising Regional Inequality in China: Fact or Artifact?," World Development, Elsevier, vol. 47(C), pages 16-29.
    3. Ma, Hengyun & Oxley, Les, 2012. "The emergence and evolution of regional convergence clusters in China's energy markets," Energy Economics, Elsevier, vol. 34(1), pages 82-94.
    4. Chao Li & John Gibson, 2013. "Spatial Price Differences and Inequality in China: Housing Market Evidence," Working Papers in Economics 13/06, University of Waikato.
    5. Hwa-Taek Lee & Gawon Yoon, 2013. "Does purchasing power parity hold sometimes? Regime switching in real exchange rates," Applied Economics, Taylor & Francis Journals, vol. 45(16), pages 2279-2294, June.
    6. Chao Li & John Gibson, 2014. "Spatial Price Differences and Inequality in the People's Republic of China: Housing Market Evidence," Asian Development Review, MIT Press, vol. 31(1), pages 92-120, March.
    7. Chao Li & John Gibson, 2018. "Regional Inequality in China allowing for Spatial Cost-of-Living Differences: Evidence from a Hedonic Analysis of Apartment Prices," Working Papers in Economics 18/12, University of Waikato.
    8. Yanjie Zhu & Les Oxley & Hengyun Ma & Wenchao Wang, 2016. "The emergence of convergent price clusters in China," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 24(1), pages 69-98, January.
    9. Hasan Muhammad Mohsin & Scott Gilbert, 2010. "The Relative City Price Convergence in Pakistan: Empirical Evidence from Spatial GLS," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 49(4), pages 439-448.
    10. Jeffrey S. Zax & Yin He, 2016. "The Law Of One Price In Chinese Factor Markets," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 61(04), pages 1-31, September.

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