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The Law of One Price: Conditional Convergence Evidence from Disaggregated Data

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Pfaffermayr, Michael

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Abstract This paper 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 sigma-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 non-tradeables. 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.
Document language English
Publication Year 2009
Page/Pages p. 3345-3357
Journal Applied Economics, 41 (2009) 26
Status Postprint; peer reviewed
Licence PEER Licence Agreement (applicable only to documents from PEER project)