Barriers to price convergence

Glushenkova, Marina, Kourtellos, Andros and Zachariadis, Marios (2018) Barriers to price convergence. Journal of Applied Econometrics . ISSN 1099-1255

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This paper uncovers novel empirical patterns in the cross-country price mechanism using a nonlinear factor model and threshold regression analysis based on individual goods retail price data for a large panel of countries. 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 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, we find an asymmetry in the extent that arbitrage opportunities related to international trade are exploited, with low initial price regime countries exhibiting faster convergence from below than high initial price regime countries exhibit from above, consistent with less resistance to exporting than to importing due to political economy considerations. We interpret our findings as evidence of a local law of one price due to barriers to price convergence influencing the duration of the effect of price shocks.

Item Type: Article
Additional Information: This is the peer reviewed version of the following article: Barriers to price convergence, Marina Glushenkova, Andros Kourtellos, Marios Zachariadis, Journal of Applied Econometrics, 2018, which has been published in final form at doi:10.1002/jae.2644. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Use of Self-Archived Versions.
Keywords: convergence clubs, micro prices, nonlinear factor model, threshold regression, law of one price, local convergence.
Schools/Departments: University of Nottingham Ningbo China > Faculty of Business > Nottingham University Business School China
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Depositing User: Zhou, Elsie
Date Deposited: 14 Sep 2018 09:29
Last Modified: 12 Jul 2020 04:30

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