Does the Law of One Price Hold within the EU? A Panel Analysis |
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Authors: | Katja Funke Isabell Koske |
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Institution: | (1) Department of Economics, WHU – Otto Beisheim School of Management, Vallendar, Germany |
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Abstract: | This paper empirically tests the law of one price by applying unit root tests to three panels consisting of data on 90 consumer
price indices for the EU-25, the EU-15 and the 10 new EU member countries that joined the EU in 2004. The four major findings
of this paper are: (1) panel unit root tests find evidence of price convergence for about 70% of all product groups, (2) the
results are sensitive to the choice of the numeraire country implying that any conclusions must be based on all bilateral
combinations, (3) the average half life across all product groups is 2.0 years, (4) the overall evidence for the law of one
price is weaker in the 10 new EU member countries than in the EU-15.
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Keywords: | Law of one price Panel unit root test Mean reversion Speed of adjustment |
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