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Barriers to price convergence

Marina Glushenkova, Andros Kourtellos and Marios Zachariadis ()

University of Cyprus Working Papers in Economics from University of Cyprus Department of Economics

Abstract: This paper investigates the existence of convergence clubs in the cross-country price mechanism for 96 individual goods retail price levels across 40 countries available semi-annually for 1990-2010, using a nonlinear factor model and threshold regression tools. To our knowledge, this is the first paper to find strong evidence for club convergence of retail prices. These clubs emerge due to the interaction of traded and non-traded factors. For example, countries that are physically closer to potential trade partners converge faster than countries in the high distance regime as long as they have low initial labor productivity or low initial income. Moreover, being behind the technology frontier appears to be more conducive to price convergence for countries with relatively small physical distance from potential trade partners. We interpret our findings as evidence of a local law of one price due to barriers to price convergence that influence the duration of the effect of price shocks.

Keywords: convergence clubs; micro prices; nonlinear factor model; threshold regression; law of one price; local convergence (search for similar items in EconPapers)
JEL-codes: F4 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2016-03
New Economics Papers: this item is included in nep-opm
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