Violating purchasing power parity

George Alessandria and Joseph Kaboski

No 04-19, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: This paper demonstrates that deviations from the law of one price are an important source of violations of absolute PPP across countries. Using highly disaggregated U.S. export data, we document evidence of systematic international price discrimination based on the local wage of consumers in the destination market. We show that most violations from absolute PPP can also be explained by international differences in wages. We find very little additional explanation is due to differences in income per capita. Developing and calibrating a model of pricing-to-market based on search frictions and international productivity differences, we show that pricing-to-market accounts for 62 percent of the relationship between national price levels and income and 100 percent of the deviation from the law of one price. In contrast, the textbook Harrod-Balassa-Samuelson effect accounts for the remaining 38 percent of the relationship between national price levels and income.

Keywords: Purchasing; power; parity (search for similar items in EconPapers)
Date: 2004
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Citations: View citations in EconPapers (5)

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Working Paper: Violating Purchasing Power Parity (2005)
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