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Barriers to price convergence

Author

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  • Marina Glushenkova
  • Andros Kourtellos
  • Marios Zachariadis

Abstract

This paper investigates the existence of convergence clubs in the cross-country price mechanism for 96 individual goods retail price levels across 40 countries available semi-annually for 1990-2010, using a nonlinear factor model and threshold regression tools. To our knowledge, this is the first paper to find strong evidence for club convergence of retail prices. These clubs emerge due to the interaction of traded and non-traded factors. For example, countries that are physically closer to potential trade partners converge faster than countries in the high distance regime as long as they have low initial labor productivity or low initial income. Moreover, being behind the technology frontier appears to be more conducive to price convergence for countries with relatively small physical distance from potential trade partners. We interpret our findings as evidence of a local law of one price due to barriers to price convergence that influence the duration of the effect of price shocks.

Suggested Citation

  • Marina Glushenkova & Andros Kourtellos & Marios Zachariadis, 2016. "Barriers to price convergence," University of Cyprus Working Papers in Economics 02-2016, University of Cyprus Department of Economics.
  • Handle: RePEc:ucy:cypeua:02-2016
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    File URL: http://papers.econ.ucy.ac.cy/RePEc/papers/02-16.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    convergence clubs; micro prices; nonlinear factor model; threshold regression; law of one price; local convergence;

    JEL classification:

    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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