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The law of one price: conditional convergence evidence from disaggregated data

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  • Peter Egger
  • Stephan Gruber
  • Michael Pfaffermayr

Abstract

This article contributes to the literature on the Law of One Price (LOP) and absolute Purchasing Power Parity (PPP) in two ways. First, it uses a novel set of PPP data from the International Comparison Programme for OECD countries and 195 internationally comparable products from 1980 to 1996. Second, it derives and applies a test of conditional σ-convergence, which does not require long-time spans or high frequency data. Between 1990 and 1996 for 10 out of 23 countries, a significant reduction in the variance of the deviations from LOP is found for tradeables, but none in case of nontradeables. For the former, the deviations from LOP close out at half-lives between 2.2 and 6.3 years. However, there are also persistent country-specific deviations from LOP parities.

Suggested Citation

  • Peter Egger & Stephan Gruber & Michael Pfaffermayr, 2009. "The law of one price: conditional convergence evidence from disaggregated data," Applied Economics, Taylor & Francis Journals, vol. 41(26), pages 3345-3357.
  • Handle: RePEc:taf:applec:v:41:y:2009:i:26:p:3345-3357
    DOI: 10.1080/00036840701426584
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