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Does the Law of One Price Hold within the EU? A Panel Analysis

  • Katja Funke

    ()

  • Isabell Koske

    ()

This paper empirically tests the law of one price by applying unit root tests to three panels consisting of data on 90 consumer price indices for the EU-25, the EU-15 and the 10 new EU member countries that joined the EU in 2004. The four major findings of this paper are: (1) panel unit root tests find evidence of price convergence for about 70% of all product groups, (2) the results are sensitive to the choice of the numeraire country implying that any conclusions must be based on all bilateral combinations, (3) the average half life across all product groups is 2.0 years, (4) the overall evidence for the law of one price is weaker in the 10 new EU member countries than in the EU-15. Copyright International Atlantic Economic Society 2008

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Article provided by International Atlantic Economic Society in its journal International Advances in Economic Research.

Volume (Year): 14 (2008)
Issue (Month): 1 (February)
Pages: 11-24

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Handle: RePEc:kap:iaecre:v:14:y:2008:i:1:p:11-24
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  1. Michael Jenkins, 2004. "Purchasing power parity and the role of traded goods: evidence from EU states," Applied Economics, Taylor & Francis Journals, vol. 36(12), pages 1371-1375.
  2. Anindya Banerjee & Massimiliano Marcellino & Chiara Osbat, 2004. "Some cautions on the use of panel methods for integrated series of macroeconomic data," Econometrics Journal, Royal Economic Society, vol. 7(2), pages 322-340, December.
  3. Pedro Gouveia & Paulo Rodrigues, 2004. "Threshold Cointegration and the PPP Hypothesis," Journal of Applied Statistics, Taylor & Francis Journals, vol. 31(1), pages 115-127.
  4. Breitung, Jörg & Pesaran, Mohammad Hashem, 2005. "Unit roots and cointegration in panels," Discussion Paper Series 1: Economic Studies 2005,42, Deutsche Bundesbank, Research Centre.
  5. Alan M. Taylor & Mark P. Taylor, 2004. "The Purchasing Power Parity Debate," NBER Working Papers 10607, National Bureau of Economic Research, Inc.
  6. Adler, Michael & Lehmann, Bruce, 1983. " Deviations from Purchasing Power Parity in the Long Run," Journal of Finance, American Finance Association, vol. 38(5), pages 1471-87, December.
  7. Chen, Natalie, 2002. "The Behaviour of Relative Prices in the European Union: A Sectoral Analysis," CEPR Discussion Papers 3320, C.E.P.R. Discussion Papers.
  8. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
  9. Brissimis, Sophocles N. & Sideris, Dimitris A. & Voumvaki, Fragiska K., 2005. "Testing long-run purchasing power parity under exchange rate targeting," Journal of International Money and Finance, Elsevier, vol. 24(6), pages 959-981, October.
  10. D. A. Peel & I. A. Venetis, 2003. "Purchasing power parity over two centuries: trends and nonlinearity," Applied Economics, Taylor & Francis Journals, vol. 35(5), pages 609-617.
  11. Jenkins, Michael A. & Snaith, Sean M., 2005. "Tests of Purchasing Power Parity via cointegration analysis of heterogeneous panels with consumer price indices," Journal of Macroeconomics, Elsevier, vol. 27(2), pages 345-362, June.
  12. Giovannini, Alberto, 1988. "Exchange rates and traded goods prices," Journal of International Economics, Elsevier, vol. 24(1-2), pages 45-68, February.
  13. Matteo Iannizzotto, 2001. "Exchange rate misalignment and nonlinear convergence to purchasing power parity in the European exchange rate mechanism," Applied Financial Economics, Taylor & Francis Journals, vol. 11(5), pages 511-526.
  14. Darby, Michael R., 1981. "Does purchasing power parity work?," Proceedings, Federal Reserve Bank of San Francisco, issue 5, pages 136-173.
  15. Papell, David H & Theodoridis, Hristos, 2001. "The Choice of Numeraire Currency in Panel Tests of Purchasing Power Parity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(3), pages 790-803, August.
  16. Pasaran, M.H. & Im, K.S. & Shin, Y., 1995. "Testing for Unit Roots in Heterogeneous Panels," Cambridge Working Papers in Economics 9526, Faculty of Economics, University of Cambridge.
  17. Maddala, G S & Wu, Shaowen, 1999. " A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 631-52, Special I.
  18. Janet Ceglowski, 2003. "The law of one price: intranational evidence for Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 36(2), pages 373-400, May.
  19. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
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