Integration and Co-Integration: Do Canada-U.S. Manufacturing Prices Obey the Law of One Price?

Abstract

This paper uses a detailed industry-level data base of industry prices in the manufacturing sector in Canada and the United States to investigate whether prices are co-integrated in the two countries and whether the relationship between the two sets of prices follows the law of one price. We find that aggregate Canadian price movements track U.S. price movements closely, but not perfectly, in the long run. But there are substantial deviations from the law of one price in the short run. Moreover, many individual industries deviate from the law of one price. These deviations are related to the degree of tariff protection and to the degree of product differentiation at the industry level.

Keywords: purchasing power parity, law of one price, panel unit roots, panel co-integration

JEL Classification: E31, F31, L60