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

  • Mario J. Crucini

    ()

    (Department of Economics, Vanderbilt University)

  • Mototsugu Shintani

    ()

    (Department of Economics, Vanderbilt University)

We study the dynamics of good-by-good real exchange rates using a micro-panel of 270 goods prices drawn from major cities in 63 countries and 258 goods prices drawn from 13 major U.S. cities. We find the half-life of deviations from the Law-of-One-Price for the average good is about 1 year. The average half-life is very similar across the OECD, the LCD and within the U.S., suggesting little in the way of nominal exchange rate regime influences. The average non-traded good has a half-life of 1.9 years compared to 1.2 years for traded-goods, for the OECD, with modest differences elsewhere. Aggregating the micro-data increases persistence in the OECD by 6 months to 1.5 years, well below levels obtained using aggregate CPI data. We attribute these differences to conceptual and methodological factors and argue in favor of increased use of micro-price data in applied theory.

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File URL: http://www.accessecon.com/pubs/VUECON/vu06-w16.pdf
File Function: Revised version, 2006, Original version 2002-12
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Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 0616.

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Date of creation: Jul 2006
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Handle: RePEc:van:wpaper:0616
Contact details of provider: Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

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