Intranational Price Convergence and Price Stickiness: Evidence from Denmark

U. Michael Bergman, Niels Lynggård Hansen and Christian Heeb⊘ll

Scandinavian Journal of Economics, 2018, vol. 120, issue 4, 1229-1259

Abstract: We show that estimates of the half‐life of deviations from the law of one price are biased when their precision is not taken into account when aggregating data for different types of goods. Using a comprehensive dataset with monthly price data for 124 homogeneous products across regions in Denmark over the period 1997–2010, we find a large positive aggregation bias. On average, we find that the half‐life is 8.4 months when taking the bias into account, compared with 28.7 months when applying the standard method. The heterogeneity in the estimated half‐life can be explained by price stickiness, distance between regions, and whether the good is traded or non‐traded.

Date: 2018
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