Convergence to the Law of One Price Without Trade Barriers or Currency Fluctuations

42 Pages Posted: 26 Sep 1996 Last revised: 25 Nov 2012

See all articles by David C. Parsley

David C. Parsley

Vanderbilt University – Finance and Economics

Shang-Jin Wei

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); International Monetary Fund (IMF); Tsinghua University - School of Economics & Management

Date Written: July 1996

Abstract

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.

Suggested Citation

Parsley, David C. and Wei, Shang-Jin, Convergence to the Law of One Price Without Trade Barriers or Currency Fluctuations (July 1996). NBER Working Paper No. w5654. Available at SSRN: https://ssrn.com/abstract=4261

David C. Parsley

Vanderbilt University – Finance and Economics ( email )

401 21st Avenue South
Nashville, TN 37203
United States
615-322-0649 (Phone)
615-343-7177 (Fax)

HOME PAGE: http://https://business.vanderbilt.edu/bio/david-parsley/

Shang-Jin Wei (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

International Monetary Fund (IMF)

700 19th Street, N.W.
Washington, DC 20431
United States

Tsinghua University - School of Economics & Management

Beijing, 100084
China

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