Nothing Special   »   [go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/p/ucy/cypeua/06-2018.html
   My bibliography  Save this paper

Non-Linearities in International Prices

Author

Listed:
  • Inkoo Lee
  • Sang Soo Park
  • Marios Zachariadis
Abstract
We consider multiple sources of non-linearity at the same time within a structural model that accounts for previously omitted variables and allows estimation of product-level convergence rates both within and outside the band of no trade. Accounting for the role of theoretically-implied variables and their non-linear interactions in the convergence process, we find that good-level convergence rates are systematically faster as compared to convergence estimates from reduced-form models. Contrary to conventional wisdom, we find that good-level price differentials exhibit mean-reverting behavior even within the bands of no trade, and that rates of mean-reversion within or outside the no-trade band are strongly related to goods' economics characteristics. Furthermore, while implied trade costs dramatically increase as we move from within country comparisons to comparisons across countries, inconsistent with our priors services have somewhat comparable trade costs to tradable goods. Finally, wage differentials are negatively associated with the speed of price adjustment and this effect is stronger for city pairs that are farther apart.

Suggested Citation

  • Inkoo Lee & Sang Soo Park & Marios Zachariadis, 2018. "Non-Linearities in International Prices," University of Cyprus Working Papers in Economics 06-2018, University of Cyprus Department of Economics.
    • Handle: RePEc:ucy:cypeua:06-2018
    as

    Download full text from publisher

    File URL: https://papers.econ.ucy.ac.cy/RePEc/papers/06-18.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Murray, Christian J. & Papell, David H., 2005. "Do Panels Help Solve the Purchasing Power Parity Puzzle?," Journal of Business & Economic Statistics, American Statistical Association, vol. 23, pages 410-415, October.
    2. Ethier, Wilfred, 1979. "Internationally decreasing costs and world trade," Journal of International Economics, Elsevier, vol. 9(1), pages 1-24, February.
    3. Andrade, Philippe & Zachariadis, Marios, 2016. "Global versus local shocks in micro price dynamics," Journal of International Economics, Elsevier, vol. 98(C), pages 78-92.
    4. Mario J. Crucini & Chris I. Telmer & Marios Zachariadis, 2005. "Understanding European Real Exchange Rates," American Economic Review, American Economic Association, vol. 95(3), pages 724-738, June.
    5. Marina Glushenkova & Andros Kourtellos & Marios Zachariadis, 2018. "Barriers to price convergence," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 33(7), pages 1081-1097, November.
    6. Zachariadis, Marios, 2012. "Immigration and international prices," Journal of International Economics, Elsevier, vol. 87(2), pages 298-311.
    7. Crucini, Mario J. & Shintani, Mototsugu, 2008. "Persistence in law of one price deviations: Evidence from micro-data," Journal of Monetary Economics, Elsevier, vol. 55(3), pages 629-644, April.
    8. Riemer P. Faber & Ad C. J. Stokman, 2009. "A Short History of Price Level Convergence in Europe," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(2‐3), pages 461-477, March.
    9. Burstein, Ariel T. & Neves, Joao C. & Rebelo, Sergio, 2003. "Distribution costs and real exchange rate dynamics during exchange-rate-based stabilizations," Journal of Monetary Economics, Elsevier, vol. 50(6), pages 1189-1214, September.
    10. Kalyan K. Sanyal & Ronald W. Jones, 2018. "The Theory of Trade in Middle Products," World Scientific Book Chapters, in: International Trade Theory and Competitive Models Features, Values, and Criticisms, chapter 13, pages 203-231, World Scientific Publishing Co. Pte. Ltd..
    11. George Alessandria & Joseph P. Kaboski, 2011. "Pricing-to-Market and the Failure of Absolute PPP," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(1), pages 91-127, January.
    12. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "A panel project on purchasing power parity: Mean reversion within and between countries," Journal of International Economics, Elsevier, vol. 40(1-2), pages 209-224, February.
    13. Jean Imbs & Haroon Mumtaz & Morten O. Ravn & Hélène Rey, 2003. "Nonlinearities and Real Exchange Rate Dynamics," Journal of the European Economic Association, MIT Press, vol. 1(2-3), pages 639-649, 04/05.
    14. Taylor, Alan M, 2001. "Potential Pitfalls for the Purchasing-Power-Parity Puzzle? Sampling and Specification Biases in Mean-Reversion Tests of the Law of One Price," Econometrica, Econometric Society, vol. 69(2), pages 473-498, March.
    15. Sercu, Piet & Uppal, Raman, 2003. "Exchange rate volatility and international trade: A general-equilibrium analysis," European Economic Review, Elsevier, vol. 47(3), pages 429-441, June.
    16. Chi‐Young Choi & Anthony Murphy & Jyh‐Lin Wu, 2017. "Segmentation of consumer markets in the US: What do intercity price differences tell us?," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 50(3), pages 738-777, August.
    17. Sarno, Lucio & Taylor, Mark P. & Chowdhury, Ibrahim, 2004. "Nonlinear dynamics in deviations from the law of one price: a broad-based empirical study," Journal of International Money and Finance, Elsevier, vol. 23(1), pages 1-25, February.
    18. Sercu, Piet & Uppal, Raman & Van Hulle, Cynthia, 1995. "The Exchange Rate in the Presence of Transaction Costs: Implications for Tests of Purchasing Power Parity," Journal of Finance, American Finance Association, vol. 50(4), pages 1309-1319, September.
    19. George Alessandria, 2009. "Consumer Search, Price Dispersion, And International Relative Price Fluctuations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(3), pages 803-829, August.
    20. Avinash Dixit, 1989. "Hysteresis, Import Penetration, and Exchange Rate Pass-Through," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 104(2), pages 205-228.
    21. Dumas, Bernard, 1992. "Dynamic Equilibrium and the Real Exchange Rate in a Spatially Separated World," The Review of Financial Studies, Society for Financial Studies, vol. 5(2), pages 153-180.
    22. Hansen Bruce E., 1997. "Inference in TAR Models," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 2(1), pages 1-16, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Marina Glushenkova & Andros Kourtellos & Marios Zachariadis, 2018. "Barriers to price convergence," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 33(7), pages 1081-1097, November.
    2. Mario J. Crucini & Chris I. Telmer & Marios Zachariadis, 2005. "Understanding European Real Exchange Rates," American Economic Review, American Economic Association, vol. 95(3), pages 724-738, June.
    3. Hyginus Leon & Serineh Najarian, 2005. "Asymmetric adjustment and nonlinear dynamics in real exchange rates," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 10(1), pages 15-39.
    4. Kim, Hyeongwoo & Ryu, Deockhyun, 2015. "A nonparametric study of real exchange rate persistence over a century," International Review of Economics & Finance, Elsevier, vol. 37(C), pages 406-418.
    5. Crucini, Mario J. & Shintani, Mototsugu, 2008. "Persistence in law of one price deviations: Evidence from micro-data," Journal of Monetary Economics, Elsevier, vol. 55(3), pages 629-644, April.
    6. Juvenal Luciana & Taylor Mark P., 2008. "Threshold Adjustment of Deviations from the Law of One Price," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 12(3), pages 1-46, September.
    7. Caglayan, Mustafa & Filiztekin, Alpay, 2012. "The law of one price and the role of market structure," MPRA Paper 36975, University Library of Munich, Germany.
    8. Luciana Juvenal & Mark P. Taylor, 2007. "The Law of One Price: Nonlinearities in Sectoral Real Exchange Rate Dynamics," Money Macro and Finance (MMF) Research Group Conference 2006 80, Money Macro and Finance Research Group.
    9. Choi, Jae Hoon & Song, Seongho, 2022. "Revisiting the PPP puzzle: Nominal exchange rate rigidity and region of inaction," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 78(C).
    10. Rodolphe Blavy & Luciana Juvenal, 2009. "Mexico's integration into NAFTA markets: a view from sectoral real exchange rates," Review, Federal Reserve Bank of St. Louis, vol. 91(Sep), pages 441-464.
    11. Mr. Gene L. Leon & Serineh Najarian, 2003. "Asymmetric Adjustment and Nonlinear Dynamics in Real Exchange Rates," IMF Working Papers 2003/159, International Monetary Fund.
    12. Giri, Rahul, 2012. "Local costs of distribution, international trade costs and micro evidence on the law of one price," Journal of International Economics, Elsevier, vol. 86(1), pages 82-100.
    13. Franses, Ph.H.B.F. & van Dijk, D.J.C., 2002. "A simple test for PPP among traded goods," Econometric Institute Research Papers EI 2002-02, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
    14. Jyh‐Lin Wu & Pei‐Fen Chen & Ching‐Nun Lee, 2009. "Purchasing Power Parity, Productivity Differentials And Non‐Linearity," Manchester School, University of Manchester, vol. 77(3), pages 271-287, June.
    15. Sarno, Lucio & Valente, Giorgio, 2006. "Deviations from purchasing power parity under different exchange rate regimes: Do they revert and, if so, how?," Journal of Banking & Finance, Elsevier, vol. 30(11), pages 3147-3169, November.
    16. Gawon Yoon, 2010. "Nonlinearity in real exchange rates: an approach with disaggregated data and a new linearity test," Applied Economics Letters, Taylor & Francis Journals, vol. 17(11), pages 1125-1132.
    17. Lee, Inkoo & Shin, Jonghyup, 2010. "Real exchange rate dynamics in the presence of non-traded goods and transaction costs," Economics Letters, Elsevier, vol. 106(3), pages 216-218, March.
    18. Mr. Gene L. Leon & Serineh Najarian, 2003. "Time-Varying Thresholds: An Application to Purchasing Power Parity," IMF Working Papers 2003/181, International Monetary Fund.
    19. Taylor, Mark P & Peel, David A & Sarno, Lucio, 2001. "Nonlinear Mean-Reversion in Real Exchange Rates: Toward a Solution to the Purchasing Power Parity Puzzles," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 1015-1042, November.
    20. Georg H. Strasser, 2010. "The Efficiency of the Global Markets for Final Goods and Productive Capabilities," Boston College Working Papers in Economics 766, Boston College Department of Economics, revised 31 Jan 2012.

    More about this item

    Keywords

    law-of-one-price; threshold auto-regressive; structural estimation; convergence rates; trade costs;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ucy:cypeua:06-2018. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://www.ucy.ac.cy/econ/?lang=en .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.