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Bivariate relative city price convergence in the United States: 1918-1997

  • Sonora, Robert J.

As in international tests of purchasing power parity, panel unit root tests have been successful in rejecting a unit root process in U.S. city relative prices over the period 1918-1997. However, there is an empirical question of what the rejection of a 'panel unit root', particularly with respect to real exchange rates, means. This paper employs a variety of univariate unit root and cointegration tests which have recently come to the fore. These tests improve the power and reduce size distortion found in standard unit root and cointegration tests such as the Dickey-Fuller and Phillips-Perron tests. I find considerable evidence for rejecting a unit root process in the majority of U.S. city relative prices over the entire sample period and two subperiods. Less successful are stationarity tests conducted on regions of the U.S.

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Article provided by Elsevier in its journal Review of Financial Economics.

Volume (Year): 17 (2008)
Issue (Month): 2 ()
Pages: 92-111

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Handle: RePEc:eee:revfin:v:17:y:2008:i:2:p:92-111
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620170

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  1. Engel, C. & Rogers, J.H., 1995. "How Wide is the Border?," Papers 4-95-16, Pennsylvania State - Department of Economics.
  2. Perron, Pierre & Ng, Serena, 1996. "Useful Modifications to Some Unit Root Tests with Dependent Errors and Their Local Asymptotic Properties," Review of Economic Studies, Wiley Blackwell, vol. 63(3), pages 435-63, July.
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  9. Robert J. Sonora, 2005. "City CPI Convergence in Mexico," Review of Development Economics, Wiley Blackwell, vol. 9(3), pages 359-367, 08.
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  12. Parsley, David C & Wei, Shang-Jin, 1996. "Convergence to the Law of One Price without Trade Barriers or Currency Fluctuations," The Quarterly Journal of Economics, MIT Press, vol. 111(4), pages 1211-36, November.
  13. Hansen, Bruce E., 1995. "Rethinking the Univariate Approach to Unit Root Testing: Using Covariates to Increase Power," Econometric Theory, Cambridge University Press, vol. 11(05), pages 1148-1171, October.
  14. Stephen G. Cecchetti & Nelson C. Mark & Robert J. Sonora, 2002. "Price Index Convergence Among United States Cities," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(4), pages 1081-1099, November.
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