Price Convergence Among Indian Cities: A Cointegration Approach
AKM Mahbub Morshed
Southern Illinois University at Carbondale - Department of Economics
Sung K. Ahn
Washington State University
American University of Sharjah - School of Business and Management
Price dynamics in Indian cities were examined using cointegration analysis. We identified and calculated a common trend for prices in 25 major cities in India. Impulse response functions were obtained to calculate the rates of convergence to the prices and we found that the half-life of any shock is very small for Indian cities. Although a close to three-month half-life seems too fast, there is some indication in the literature that half-life can be much smaller than the conventional rates of 3 to 5 years. We have calculated half-life using the panel unit root method, and found that estimates of half-life from cointegration analysis provide a faster convergence rate than estimates using the panel unit root method. We also analyzed how shock can be transmitted from one city to another and found no systematic behavior of transmission from one city to another.
Number of Pages in PDF File: 22
Keywords: Law of One Price, Price Convergence, Half-life, Cointegration
JEL Classification: F15, E31, C23working papers series
Date posted: January 21, 2006
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