Price level convergence, purchasing power parity and multiple structural breaks: An application to US cities

Syed A. Basher () and Josep Carrion-i-Silvestre
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Syed A. Basher: Department of Economic Policies, Qatar Central Bank, Doha, Qatar.

No XREAP2008-08, Working Papers from Xarxa de Referència en Economia Aplicada (XREAP)

Abstract: This article provides a fresh methodological and empirical approach for assessing price level convergence and its relation to purchasing power parity (PPP) using annual price data for seventeen US cities. We suggest a new procedure that can handle a wide range of PPP concepts in the presence of multiple structural breaks using all possible pairs of real exchange rates. To deal with cross-sectional dependence, we use both cross-sectional demeaned data and a parametric bootstrap approach. In general, we find more evidence for stationarity when the parity restriction is not imposed, while imposing parity restriction provides leads toward the rejection of the panel stationarity. Our results can be embedded on the view of the Balassa-Samuelson approach, but where the slope of the time trend is allowed to change in the long-run. The median half-life point estimate are found to be lower than the consensus view regardless of the parity restriction.

Pages: 51 pages
Date: 2008-07, Revised 2008-07
New Economics Papers: this item is included in nep-geo and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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http://www.xreap.cat/RePEc/xrp/pdf/XREAP2008-08.pdf First version, 2008 (application/pdf)
http://www.xreap.cat/RePEc/xrp/pdf/XREAP2008-08.pdf Revised version, 2008 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:xrp:wpaper:xreap2008-08

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