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Persistence in Law-Of-One-Price Deviations: Evidence from Micro-Data

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  • Mario J. Crucini

    (Department of Economics, Vanderbilt University)

  • Mototsugu Shintani

    (Department of Economics, Vanderbilt University)

Abstract

We study the dynamics of good-by-good real exchange rates using a micro-panel of 270 goods prices drawn from major cities in 71 countries and 245 goods prices drawn from 13 major U.S. cities. We find half-lives of deviations from the Law-of-One-Price for the average good is about 1 year; somewhat lower for U.S. cities and somewhat higher for cities in the OECD with LDC cities in between. This speed of adjustment is well below the consensus range of estimates of 3 to 5 years for purchasing power parity deviations yet consistent with plausible `price-stickiness.' We further construct price indices using our micro data and find that aggregation bias combined with small sample bias accounts for a large part of the difference between micro and macro estimates for the OECD.

Suggested Citation

  • Mario J. Crucini & Mototsugu Shintani, 2002. "Persistence in Law-Of-One-Price Deviations: Evidence from Micro-Data," Vanderbilt University Department of Economics Working Papers 0222, Vanderbilt University Department of Economics, revised Jul 2004.
  • Handle: RePEc:van:wpaper:0222
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    More about this item

    Keywords

    Real exchange rates; purchasing power parity; law of one price; dynamic panel;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General

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