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Regional mc parity: do common pricing points reduce deviations from the law of one price?

  • Thomas Y. Mathä

    ()

This paper analyses price differences of McDonald?s products in four different countries. I show that pricing at pricing points in different currencies may contribute to explaining deviations from the law of one price. Observing strictly equal prices is more probable if prices are at psychological and fractional pricing points in a common currency. The latter is also found to reduce the size of price deviations. Additionally, price differences increase as transaction costs increase. Based on this data set there is no evidence that the euro has reduced price deviations.

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File URL: http://www.bcl.lu/fr/publications/cahiers_etudes/34/BCLWP034.pdf
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Paper provided by Central Bank of Luxembourg in its series BCL working papers with number 34.

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Length: 17 pages
Date of creation: Sep 2008
Date of revision:
Publication status: published in Review of World Economics / Weltwirtschaftliches Archiv, 2009, 145(1): 155-166.
Handle: RePEc:bcl:bclwop:bclwp034
Contact details of provider: Web page: http://www.bcl.lu/

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  1. Engel, Charles & Rogers, John H, 1996. "How Wide Is the Border?," American Economic Review, American Economic Association, vol. 86(5), pages 1112-25, December.
  2. David Parsley Shang-Jin Wei, 2002. "Currency Arrangements And Goods Market Integration: A Price Based Approach," International Finance 0211004, EconWPA.
  3. Crucini, Mario J. & Shintani, Mototsugu, 2008. "Persistence in law of one price deviations: Evidence from micro-data," Journal of Monetary Economics, Elsevier, vol. 55(3), pages 629-644, April.
  4. David C. Parsley & Shang-Jin Wei, 1996. "Convergence to the Law of One Price Without Trade Barriers or Currency Fluctuations," NBER Working Papers 5654, National Bureau of Economic Research, Inc.
  5. Robert E. Cumby, 1996. "Forecasting Exchange Rates and Relative Prices with the Hamburger Standard: Is What You Want What You Get With McParity?," NBER Working Papers 5675, National Bureau of Economic Research, Inc.
  6. Bart Hobijn & Andrea Tanbalotti & Federico Ravenna, 2005. "Menu Costs at Work: Restaurant Prices and the Introduction of the Euro," 2005 Meeting Papers 659, Society for Economic Dynamics.
  7. Matthias Lutz, 2002. "Beyond Burgernomics and MacParity: Exchange Rate Forecasts Based on the Law of One Price," 10th International Conference on Panel Data, Berlin, July 5-6, 2002 D4-1, International Conferences on Panel Data.
  8. Thomas Mathä, 2003. "What to expect of the euro? Analysing price differences of individual products in Luxembourg and its surrounding regions," BCL working papers 8, Central Bank of Luxembourg.
  9. Lutz, Matthias, 2003. "Price Convergence under EMU? First Estimates," Royal Economic Society Annual Conference 2003 143, Royal Economic Society.
  10. Michael R. Pakko & Patricia S. Pollard, 1996. "For here or to go? Purchasing power parity and the Big Mac," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 3-22.
  11. David C. Parsley & Shang-Jin Wei, 2003. "The Micro-foundations of Big Mac Real Exchange Rates," IEHAS Discussion Papers 0306, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  12. Basu, Kaushik, 1997. "Why are so many goods priced to end in nine? And why this practice hurts the producers," Economics Letters, Elsevier, vol. 54(1), pages 41-44, January.
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