Bivariate relative city price convergence in the United States: 1918-1997

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Abstract

As in international tests of purchasing power parity, panel unit root tests have been successful in rejecting a unit root process in U.S. city relative prices over the period 1918-1997. However, there is an empirical question of what the rejection of a 'panel unit root', particularly with respect to real exchange rates, means. This paper employs a variety of univariate unit root and cointegration tests which have recently come to the fore. These tests improve the power and reduce size distortion found in standard unit root and cointegration tests such as the Dickey-Fuller and Phillips-Perron tests. I find considerable evidence for rejecting a unit root process in the majority of U.S. city relative prices over the entire sample period and two subperiods. Less successful are stationarity tests conducted on regions of the U.S.

Original languageEnglish
Pages (from-to)92-111
Number of pages20
JournalReview of Financial Economics
Volume17
Issue number2
DOIs
StatePublished - 2008

Keywords

  • Cointegration
  • Price index convergence
  • Purchasing power parity
  • Unit root tests

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