convergence to the law of one price without trade barriers or currency fluctuations using a panel of 51 prices from 48 cities in the united states we provide an upper bound estimate of the rate of convergence to purchasing power parity we find convergence rates substantially higher than typically found in cross country data we investigate some potentially serious biases induced by i i d measurement errors in the data and find our estimates to be robust to these potential biases we also present evidence that convergence occurs faster for larger price differences finally we find that rates of convergence are slower for cities farther apart however our estimates suggest that distance alone can only account for a small portion of the much slower convergence rates across national borders

monetary union price level convergence and inflation how close is europe to the usa abstract the pattern of price dispersion across european and us cities from 1990 to 2004 is documented there is a striking decline in dispersion for traded goods prices in europe most of which took place prior to the launch of the euro dispersion in the euro area is now quite close to that of the usa this evidence provides useful facts for future work assessing the importance of various developments in europe harmonization of tax rates convergence of incomes and labor costs liberalization of trade and factor markets and increased coherence of monetary policy

the behavior of prices and inflation an empirical analysis of disaggregat price data this paper analyzes the effects of inflation on the dispersion of prices as well as other aspects of price behavior using disaggregated data on prices of foodstuffs in israel during 1978 84 we find that the effect of expected inflation on intramarket price variability is stronger than the effect of unexpected inflation we show that even in times of high inflation price quotations are not trivially short and price changes are not synchronized across firms these facts taken together confirm that there is some staggering in the setting of prices we find that the distribution of real prices is far from being uniform as many menu cost based models assume or conclude in fact as inflation increases to very high levels this distribution is not even symmetric when the annual inflation rate reaches 130 percent there are equal chances of finding real prices above or below the market average but upward deviations in the real price are further away from zero than downward ones furthermore as the annu

menu costs and markov inflation a theoretical revision with new evidence abstract we revisit a foundational theoretical paper in the menu cost literature sheshinski and weiss 1983 optimum pricing policy under stochastic inflation review of economic studies 50 3 513 529 one of the few to treat stochastic inflation with persistent deviations from trend in contrast to the original finding we show that optimal pricing in this environment entails using different s s bands in high inflation and low inflation states of the world the low inflation band is strictly contained within the high inflation band this revised solution has very different implications from the original one firms are generally risk loving not risk averse with respect to inflation an increase in the variance of inflation increases price dispersion when inflation is high and decreases price dispersion when inflation is low on an aggregate level this optimal pricing would lead to bunching of prices and non neutrality of money in the setting of caplin and spulber 1987 menu costs and the neutrality of money quarterly journal of economics 102 4 703 725 to test the main finding we construct an establishment level dataset from the months surrounding mexico s tequila crisis in 1995 in the high inflation state price increases are larger and establishments allow their prices to vary more widely around their respective long run mean relative prices cross establishment price dispersion is lower but this result seems due to decreased establishment heterogeneity rather than narrower s s bands overall the evidence suggests that establishments employ wider s s bands in the high inflation state

learning in an equilibrium search model this paper explores the role of learning in an equilibrium search model with asymmetric information firms with identical but privately observed marginal cost sell a homogeneous good to heterogeneously informed consumers a reservation price equilibrium exists if the uninformed consumers search cost is sufficiently large in this equilibrium the amount of price dispersion is inversely related to the realization of marginal cost also the average price level is less responsive to cost changes than when cost is observable finally uncertainty about firms marginal cost increases the expected price level copyright 1994 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

relative price variability and inflation evidence from us cities we test whether the time series positive correlation of inflation and intermarket relative price variability is also present in a cross section of u s cities we find this correlation to be a robu

is purchasing power parity overvalued the purpose of this paper is to re examine the hypothesis of long run purchasing power parity among industrial countries under the current float using the panel data approach we propose a new finite sample panel data unit root test procedure that allows for a general serial correlation structure and arbitrary contemporaneous correlation in model innovations across countries this procedure is then applied to the recently developed panel data unit root tests of im pesaran and shin 1996 and of maddala and wu 1999 the test results show sufficient evidence against the unit root null for most samples by comparing our results with the existing ones in the literature we found that the method of assuming a restrictive serial correlation structure tends to weaken evidence against the unit root null

panel cointegration results on international capital mobility in asian economies abstract this paper investigates the feldstein horioka coefficients for 11 asian countries using the recently developed between group fmols and dols panel cointegration techniques savings and investment rates are found to be nonstationary and to be cointegrated in panels the estimated coefficients using fmols and dols are 0 39 and 0 42 respectively for the period 1980 1998 these values are much smaller than the estimates of 0 58 and 0 76 for 1960 1979 the small coefficients suggest that capital mobility increased in asian countries in the 1980s and 1990s

yen or yuan the law of one price and economic integration in asia using highly comparable local retail prices of 146 goods and services across 18 asian countries over 1990 2014 we analyse price dispersion and test convergence to the law of one price lop for these prices around three price benchmarks asia average japan and china prices to gain insight about market integration in overall asia as well relative integration of asian economies to japan and china cross asia price dispersion around china price benchmark for both tradables and non tradables diminishes significantly over the sample period whereas that around japan price benchmark increases considerably particularly after the 2008 crisis there is convergence to the lop for about half of goods and services in china and asia average price benchmarks the percentage of convergent prices is significantly smaller in japan price benchmark direct estimates of the convergence speed parameter also confirm these observations overall our results show evidence of increasing economic integration in asia in the last two decades the process of price convergence appears to be driven by the emergence of china as the centre of economic gravity in the region there is much room for improvement as economic integration in asia is still far below that in europe in the 1990s or usa in the 1980s

the overvaluation of purchasing power parity abstract recent panel studies of purchasing power parity have reported strong evidence of mean reversion in real exchange rates however these studies fail to control for cross sectional dependence in the data this failure has dramatic consequences raising the significance level of tests with a nominal size of 5 percent to as much as 50 percent it is shown in this paper that controlling for cross sectional dependence no evidence against the random walk null can be found in panels of up to 64 real exchange rates this finding cannot be attributed to low power as there is ample power in panels of this size to reject the unit root null

price index convergence among united states cities we study the dynamics of price indices for major u s cities using panel econometric methods and find that relative price levels among cities mean revert at an exceptionally slow rate in a panel of 19 cities from 1918 to 1995 we estimate the half life of convergence to be approximately nine years the surprisingly slow rate of convergence can be explained by a combination of the presence of transportation costs differential speeds of adjustment to small and large shocks and the inclusion of nontraded goods prices in the overall price index do price indices in major u s cities share a common trend and if so how quickly do they revert to that trend following a local shock to the price index to answer this question we study the dynamics of consumer price indices for 19 major u s cities over the period from 1918 to 1995 the panel time series methods we employ are now commonly used for studying real output growth rates and levels of real exchange rates across countries we estimate that price index divergences across u s cities are temporary but surprisingly persistent with a half life of nearly nine years our research has two primary motivations first we hope to gain a better understanding of the sources of persistence in the deviations from purchasing power parity ppp found in studies of national price indices and exchange rate data second and more importantly we see the european monetary union as having many similarities to the united states and believe that studying the behavior of prices across u s cities will help us in understanding the likely nature of inflation convergence in the euro area the european central bank s stated inflation objective is a year on year change in the harmonized index of consumer prices hicp of not more than 2 but how large might we expect regional deviations from this euro area wide average to be and how long are they likely to persist the lack of data prevents us from answering this question directly using european prices under monetary union instead we look to the united states a mature common currency area of similar regional diversity size and industrial development

inflation price dispersion and market structure abstract in this paper we use a novel data set containing prices from bazaars convenience stores and supermarkets in istanbul to re examine the relationship between price dispersion and inflation although existing evidence is mixed we find positive and significant relationships between dispersion on the one hand and lagged dispersion and unexpected product specific inflation on the other we also find evidence that dispersion is initially decreasing in anticipated aggregate inflation but is eventually increasing finally average price duration and dispersion are lowest in the bazaar this is intuitive since menu and search costs should be minimal in that market structure

inflation and relative price variability new evidence for the united states this article provides new evidence on the empirical relationship between inflation and relative prices in the united states in line with the predictions of recent monetary search models we find that the impact of expected inflation on relative price variability rpv has disappeared during the recent period when inflation expectations have been stabilized on a low level endogenous break point tests are applied to identify the timing and to confirm the significance of the changing role of inflation for rpv the empirical findings are robust with respect to different price indices disaggregation levels and measurement concepts

price dispersion and inflation evidence from israel the paper considers the question whether observed price differentials reflect perceived differences in quality service agreements or location or whether information imperfections can explain this phenomenon it sets out theoretical arguments linking inflation to reductions in the information stock held by agents and thus to greater price dispersion the hypothesis is tested using monthly price data for 13 uniquely defined goods sold in israel between 1971 and 1984 price dispersion is shown to be positively related to the rate of market price inflation since inflation is an unlikely proxy for changes in perceived characteristics the findings support price dispersion theories based on optimally imperfect decision making

price setting under uncertainty about inflation abstract we analyze the manipulation of inflation statistics that occurred in argentina starting in 2007 to test the relevance of informational frictions in price setting we estimate that the manipulation of statistics was associated with a higher degree of price dispersion this effect is analyzed in the context of a quantitative general equilibrium model in which firms use information about the inflation rate to set prices reporting inaccurate measures of the cpi entails significant welfare losses especially in economies with volatile monetary policy

sectoral variability and the foundations of optimal inflation rate abstractthe recent monetary search models argue that the real effects of inflation on economic activity can be gauged through relative price variability rpv our study uses a large panel data of

a note on price behavior in urban pakistan this article examines the price behavior of consumer goods in the strategically vital country of pakistan results show that prices converge both temporally and spatially a wage adjusted consumer price index shows that pakistani cities have converging costs of living finally a novel measure of cointegration ranks the most and least economically integrated cities divergence does not occur along provincial linguistic or ethnic boundaries

inflation price dispersion and market integration through the lens of a monetary search model monetary search theory implies that the real effects of inflation via its impact on price dispersion depend on the level of search costs and thus on the level of market integration for less integrated markets the inflation price dispersion nexus is predicted to be asymmetrically v shaped which results in an optimal inflation rate above zero for highly integrated markets with low search costs however the impact of inflation on price dispersion should only be small using price data of the european union member states this paper is the first that tests and confirms these predictions of monetary search theory

frictional goods markets theory and applications we analyse dynamic general equilibrium models with more or less directed search by informed buyers and random search by uninformed buyers this nests existing specifications and generates new insights a quantitative application concerns the welfare cost of inflation which is known to be quite high with pure random search and low with pure directed search our calibration implies the impact of inflation is fairly low in part because in addition to the usual costs it provides benefits by more heavily taxing high price sellers that inefficiently profit from exploiting the uninformed other applications analyse analytically and numerically changes in credit conditions and information

do the asean countries and taiwan form a common currency area abstract common currency areas and asian common currency areas in particular are highly topical and somewhat controversial areas for research we explore the hypothesis that the members of the association of southeast asian nations meet necessary conditions for forming a common currency area and whether taiwan appears a natural member of such an area we test data on the asean countries and taiwan for consistency with a common currency area we produce the first evidence that these five asean countries and the asean countries plus taiwan meet the microeconomic criteria to form a common currency area

is there any asymmetry in the effect of inflation on relative price variability abstract it is widely perceived that relative prices are more dispersed in periods of price decreases than in periods of price increases we show that the asymmetry results from misspecifying the true u shaped underlying model with a piecewise linear regression model

a comparison of canadian and japanese cognitive styles implications for management interaction many american and canadian companies seeking to form joint ventures and alliances with japanese companies or to negotiate contracts with them have discovered that the interaction can be difficult and frustrating value differences and preferences for different management practices have been identified that contribute to these interaction problems however little research has investigated potential differences in cognitive style that might also contribute to intercultural conflict this study compares samples of canadian and japanese mba students using the myers briggs type inventory mbti and links the findings to interaction difficulties reported in the literature

price dispersion inflation and welfare we examine the implications of inflation for both price dispersion and welfare in a monetary search economy in our economy if the degree of buyers incomplete information about prices is fixed both price dispersion and real prices are increasing in inflation as the inflation rate approaches the friedman rule both price dispersion and welfare losses vanish if households choose the number of prices to observe then the optimal inflation rate may exceed the friedman rule as inflation induces search and up to a point raises welfare by eroding market power

the rigidity of prices this paper uses evidence on individual transaction prices to analyze price behavior the evidence shows that for many transactions pricesremain rigid for periods exceeding one year the rigidity of price ispositively correlated with industry concentration for several productsthe correlation of price changes across buyers is low the paper alsoinvestigates the relationship between price rigidity price change andthe length of time a buyer and seller have been doing business together the author interprets the evidence as emphasizing the importance of nonprice rationing and the inadequacy of models in whichprice movements alone clear markets copyright 1986 by american economic association

intercountry differences in the relationship between relative price variability and average prices this paper provides new evidence on the relationship between relative price variability and inflation the model uses a consistently defined data set for nine european countries it benefits from the inclusion and testing of the effects of macroeconomic variables and the incorporation into the measures of inflation and dispersion adjustments for timeliness appropriate formulas and proximity the general findings of an effect on relative price variability by the macroeconomic environment and negative coefficients on unexpected inflation are supported by their occurrence in models estimated by seemingly unrelated regression and a robust systems estimator

optimum pricing policy under stochastic inflation we describe aggregate inflation as a stochastic process in which the rate of change of the price level can be positive or zero where the times spent in each state are of random duration this class of processes includes two state markov chains and renewal processes as special cases it is shown that the optimal pricing policy of a monopolistic firm with non convex costs of price adjustment is s s in its real price i e its nominal price relative to the price level a basic certainty equivalence result is proved i e the firm behaves as if it faces a certain and fixed rate of inflation higher than the actual expected rate the difference between the two rates being a risk premium which depends on the real interest rate and the parameters of the stochastic process one can thus apply previous results from the case of certainty sheshinski and weiss review of economic studies 1977 to obtain comparative static results in particular one finds that an increase in the variance of expected inflation leads firms to choose a pricing policy with larger amplitude in real price the paper also addresses the question of consistency in firms expectations when the price level is determined by the firms actions in this paper we consider pricing policies of individual firms in an inflationary environment each firm expects the general price level to increase and must determine the rate of increase of its own price it is assumed that the firm incurs an adjustment cost when it changes its nominal price consequently firms choose to change prices occasionally rather than continuously

sticky prices and costly credit we develop a theory of money and credit as competing payment instruments then put it to work in applications agents use cash and credit because the former latter is subject to the inflation tax transaction costs frictions that make the choice of payment method interesting also imply equilibrium price dispersion we derive closed form solutions for money demand and show how to simultaneously account for the price change facts cash credit shares in micro data and money interest correlations in macro data the effects of inflation on welfare price dispersion and markups are discussed as are nonstationary equilibria with dynamics in the price distribution

the purchasing power parity debate originally propounded by the 16th century scholars of the university of salamanca the concept of purchasing power parity ppp was revived in the interwar period in the context of the debate concerning the appropriate level at which to re establish international exchange rate parities broadly accepted as a long run equilibrium condition in the post war period it first was advocated as a short run equilibrium by many international economists in the first few years following the breakdown of the bretton woods system in the early 1970s and then increasingly came under attack on both theoretical and empirical grounds from the late 1970s to the mid 1990s accordingly over the last three decades a large literature has built up that examines how much the data deviated from theory and the fruits of this research have provided a deeper understanding of how well ppp applies in both the short run and the long run since the mid 1990s larger datasets and nonlinear econometric methods in particular have improved estimation as deviations narrowed between real exchange rates and ppp so did the gap narrow between theory and data and some degree of confidence in long run ppp began to emerge again in this respect the idea of long run ppp now enjoys perhaps its strongest support in more than 30 years a distinct reversion in economic thought

the effects of general inflation and idiosyncratic cost shocks on within commodity price dispersion evidence from microdata this study investigates the dispersion of price levels within highly disaggregated markets by examining plant level product records from the u s census of manufactures the paper estimates the effects of inflation on price dispersion through cross sectional variation in the drift rate of average input costs within a market arguing that in several models that relate inflation to price dispersion the effects of cost increases on dispersion is similar to the effects of general inflation we also disentangle the effects of aggregate and idiosyncratic shocks on price dispersion in general we find that the higher the drift rate of input costs of a given commodity the larger the amount of price dispersion the standard deviation of idiosyncratic shocks also is positively correlated with the degree of price dispersion

contingent prices and money price posting with directed search is a widely used trading mechanism coles and eeckhout showed that if sellers are allowed to post prices contingent on realized demand instead of one price then there is real market indeterminacy in this article we fit this contingent price posting protocol into a monetary economy we show that as long as holding money is costly there exists a unique equilibrium rather than a continuum in this equilibrium sellers post a low price for when the buyer is alone a high price for when several buyers show up and buyers randomize between sellers and money holdings

relative price and inflation variability in a simple consumer search model there is a large empirical literature on the effect of aggregate inflation on both price level dispersion relative price variability rpv and inflation rate dispersion relative inflation variability riv across goods or locations early empirical work of riv has an explicit theoretical foundation in signal extraction models however recent empirical work on rpv has produced results inconsistent with signal extraction models in particular while riv is increasing in the absolute value of inflation shocks rpv is a negative monotonic function of inflation shocks we show that consumer search theory offers a potential explanation for these apparently contradictory observations

global price dispersion are prices converging or diverging abstract this paper documents significant time variation in the degree of global price convergence over the last fifteen years in particular there appears to be a general u shaped pattern with price dispersion first falling and then rising in recent years a pattern which is remarkably robust across country groupings and commodity groups this time variation is difficult to explain in terms of the standard gravity equation variables common in the literature as these tend not to vary much over time or have not risen in recent years however regression analysis indicates that this time varying pattern coincides well with oil price fluctuations which are clearly time varying and have risen substantially since the late 1990s as a result this paper offers new evidence on the role of transportation costs in driving international price dispersion

the law of one price evidence from the transitional economy of china abstract this paper applies the recently developed econometric methods of panel unit root tests and nonlinear mean reversion to investigate price convergence in china the largest transitional economy in the world we find that prices did converge to the law of one price in china for an overwhelming majority of goods and services based on a large panel data set the finding sheds light on the extent of the market economy in china and casts doubt on young s proposition that the economic reform has led to the fragmentation of chinese domestic markets