The law of one price: conditional convergence evidence from disaggregated data

This article contributes to the literature on the Law of One Price (LOP) and absolute Purchasing Power Parity (PPP) in two ways. First, it uses a novel set of PPP data from the International Comparison Programme for OECD countries and 195 internationally comparable products from 1980 to 1996. Second, it derives and applies a test of conditional σ-convergence, which does not require long-time spans or high frequency data. Between 1990 and 1996 for 10 out of 23 countries, a significant reduction in the variance of the deviations from LOP is found for tradeables, but none in case of nontradeables. For the former, the deviations from LOP close out at half-lives between 2.2 and 6.3 years. However, there are also persistent country-specific deviations from LOP parities.     

Testing the law of one price in food markets: evidence for Colombia using disaggregated data

This article applies stationarity tests to examine evidence of market integration for a relatively large sample of food products in Colombia. We find little support for market integration when using the univariate KPSS tests for stationarity. However, within a panel context and after allowing for cross-sectional dependence, the Hadri tests provide much more evidence supporting the view that food markets are integrated or, in other words, that the law of one price holds for most products.     

Non-Walrasian equilibria and the law of one price

We present a market game which features multiple posts for each commodity. We use this framework to illustrate the idea that in non-Walrasian markets, where individual activities influence market clearing prices, there are equilibria where commodities are exchanged simultaneously in two posts at different prices, thus defying the ‘law of one price’. Such equilibria are compatible with an apparent arbitrage possibility, which dissipates whenever individuals try to take advantage of it.     

Trading imbalances and the law of one price

We study trading and prices of Chinese (mainland)/Hong Kong dual-listed shares. Relative prices can diverge by a factor of two and exhibit significant variation over time. Order imbalances explain contemporaneous changes in relative prices at daily and weekly frequencies.     

The law of one price: an examination of price integration between Europe and regional markets in Africa

This study examines the degree of price-integration of equity indices between the major markets of Africa, namely Morocco, Tunisia, Egypt, Kenya, Nigeria, Namibia and South Africa with the European markets of London and Paris. Vector Autoregressive and Autoregressive Distributed Lag methods reveal that African markets are largely price-segmented. The only markets that are price-integrated have shared economic and financial institutions, such as Namibia and South Africa, and Egypt, Tunisia and France. The evidence suggests that development policy should be focussed on enhancing existing institutions rather than embarking prematurely on regional integration.     

The law of one price and the modelling of disaggregated trade flows

This paper argues that the application of a differentiated good model to disaggregated commodity trade, and in particular to primary commodity trade, is feasible. Price data for as narrowly defined a commodity as wheat are shown to violate the law of one price. An Armington-type model which allows prices of a commodity to vary by supplier is then applied to world wheat trade. Two issues concerning the Armington model are addressed. First, it is shown that the theoretical implications of the model are plausible in the case of a disaggregated commodity. Second, as an example, 1973–1974 wheat trade flows and prices forecast by an Armington-type model are shown to be consistent with actual trade patterns and prices.     

Time-varying threshold cointegration and the law of one price

A theoretical model of the law of one price which allows for seasonality in transaction costs and supply and demand conditions between markets is developed. Bivariate three-regime threshold vector error correction models are applied to natural gas markets to examine seasonality in threshold levels. Results indicate that there are nonlinear adjustments to the law of one price in seven pair-wise markets (Chicago is used as the base market). In the natural gas sector, dynamic threshold effects relative to the Chicago market vary depending on season, geographical location and whether the market is an excess producing or consuming market.     

Income distribution evaluation and the law of one price

The growing literature on evaluating changes in the distribution of income has led recently to a consideration of the conditions under which such evaluation is possible without reference to existing prices. This paper provides a complete characterization of the class of preferences/social orderings for which this is possible in the case where the law of one price is not assumed— different individuals may face different price vectors. The relationship of this result to those which are known for the one-price case is also briefly considered.     

The law of one price cannot be rejected: Two tests based on the tradable/nontradable price ratio

In contrast to conventional, disaggregative testing of the law of one price, this study adopts an aggregative approach. Using a tradable/nontradable level of aggregation, a model is developed to test equality of the prices of tradables and nontradables domestically and equality of the price of tradables internationally. The disaggregative approach exhibits biases that lead to rejection of the law of one price. In contrast, the results of the aggregative technique for the law of one price are strongly positive and the limitations of the approach are found not to overcome its findings.     

Copula-based nonlinear modeling of the law of one price for lumber products

This paper proposes an alternative and potentially novel approach to analyzing the law of one price in a nonlinear fashion. Copula-based models that consider the joint distribution of prices separated by space are developed and applied to weekly prices for lumber products. The copulas capture nonlinearities that arise in the extremes of the joint distributions of price differentials and suggest faster equilibrating adjustments when deviations from parity are extreme.     

Domestic market integration and the law of one price in Brazil

This article presents the first assessment of domestic market integration in Brazil using the law of one price. The law of one price is tested using two panel unit root methodologies and a unique data set comprising price indices for 51 products across 11 metro-areas. We find that the law holds for most tradable products and, not surprisingly, nontradable products are found to be less likely to satisfy the law of one price. While these findings are consistent with evidence found for other countries, price convergence occurs very slowly in Brazil, suggesting relatively limited domestic market integration.     

Poverty dynamics: empirical evidence for Canada

Abstract. Poverty (low income) dynamics are explored using tax filer data covering the period 1992 to 1996. The distributions of short‐ and long‐term episodes are identified and reveal substantial differences by sex and family type. Entry and exit models explore the relationships between poverty transitions and sex, family status and other personal and situational attributes. Duration effects on exiting and re‐entering poverty are found to be important, and models including past poverty experiences point to strong ‘occurrence dependence’ for poverty entry and incidence. Fixed‐effect panel data models confirm the above and reveal asymmetries in the impacts of household transitions on poverty. JEL Classification: I3 La dynamique de la pauvreté : résultats empiriques pour le Canada. Les auteurs examinent la dynamique de la pauvreté(bas revenus)à l’aide des données disponibles pour les citoyens qui ont soumis leurs rapports d’impôt entre 1992 et 1996. On identifie les distributions d’épisodes (courts et longs) de pauvreté, et celles‐ci révèlent des différences significatives selon le sexe et les attributs familiaux. Les modèles d’entrée et sortie identifient les relations entre le statut de pauvreté, le sexe, le statut familial, et d’autres attributs personnels et situationnels. Il appert que les effets de durée sur les périodes de sortie et de ré‐entrée dans un statut de pauvreté sont importants; les modèles qui prennent en compte les épisodes de pauvreté antérieurs montrent qu’il y a une forte corrélation (occurrence dependence) tant pour le passage au statut de pauvreté que pour l’incidence de tels épisodes. Les résultats des études transversales confirment ces résultats et révèlent des asymétries dans les impacts des transitions dans les ménages sur la pauvreté.     

Relative price variability and inflation: The Italian evidence

Using Italian data from 1954 to 1983, it is found that relative price variability and inflation are positively correlated only during the 1970s and the early 1980s, when their relationship appears to be largely induced by movements in the oil price, rather than by aggregate demand shocks. This result is consistent with the findings of Fischer, 1981, Fischer, 1982 for the U.S. and Germany (although, in contrast to the evidence for these two countries, no relationship can be detected between unexpected inflation and relative price variability). Furthermore, the comparison between the three countries provides substantial support for the hypothesis — tentatively advanced by Fischer (1982) — that the correlation between relative price variability and inflation is enhanced by monetary accommodation of real shocks. There is also evidence that in Italy both variables have been considerably affected by exchange rate movements.     

The compelling effects of compulsory schooling: evidence from Canada

Abstract.  Compulsory school laws have existed for more than a hundred years, and policies to mandate further education continue to be discussed. The implications of these laws, however, are not well understood. Historical changes to compulsory schooling in Canada permit an examination of their effects on would‐be‐dropouts under very different circumstances than those during changes in other countries. Mandating education substantially increased adult income and substantially decreased the likelihood of being below the low‐income cut‐off unemployed, and in a manual occupation. These findings suggest significant gains from this legislation, which seem unlikely offset by the costs incurred while having to remain in school. JEL classification: I20, I28     

The price of the euro: evidence from sovereign debt markets

The objective of this article is to ascertain how the Economic and Monetary Union (EMU) in Europe has affected its members’ long-term government bond yields. In order to estimate the effect, this article utilizes a synthetic control approach. The main finding is that the majority of the member countries did not receive economic gains from the EMU in sovereign debt markets. Synthetic counterfactual analysis finds strong evidence that Austria, Belgium, Finland, France and the Netherlands have paid a positive and substantial euro-premium in their 10-year government bonds since the adoption of the single currency. After the most recent financial crisis, government bond yields have been higher in all member countries compared to the situation that would have occurred without the monetary unification. This article concludes that from the viewpoint of sovereign borrowing, it would be beneficial for a country to maintain its own currency and monetary policy.     

Cointegration and causality in the exports-GDP nexus: The post-war evidence for Canada

This paper tests for unit roots, cointegration, and Granger-causality in the exports-GDP nexus in Canada 1947–96, using both bivariate and trivariate models. Contrary to previous studies we cannot conclude that economic growth is either export-led, or output-driven, but rather that strong bi-directional causality exists between Canadian exports and GDP, and the GDP of its main trading partner, the United States. First version received: April 1998/final version received: March 1999     

A price index for Canada, 1688 to 1850

This paper presents the first price index for any region of Canada that spans from the colonial era to the mid‐19th century. I constructed it using prices from the account books of religious congregations with estates throughout modern‐day Quebec. It represents a substantial improvement over previous indexes thanks to the consistent price quotations in the source material, the high frequency of observations for many goods, the vast number of goods and the inclusion of numerous non‐agricultural and non‐food goods. Its price trends differ mildly from those of existing but less‐comprehensive price indexes. I link this new index with post‐1850 indexes to create a 328‐year price index for Canada.     

Import price elasticities: reconsidering the evidence

Recent economic geography and trade empirical studies based on monopolistic competition suggest high levels of trade price elasticities (between 3 and 11). However, price elasticity estimations in trade equations using unit values as price proxies usually lead to lower values of around unity. We show that those inconclusive results may be due to some misspecification in these equations as well as measurement errors in prices. When suitable instrumental variables are used, within a panel of industrialized countries, we obtain high price elasticities, the majority ranging from 1 to 13. The highest estimates correspond to industries producing homogeneous goods. JEL classification: C2, C3 and F1.
Les élasticités prix des importations : un nouveau coup d'oeil aux résultats. Plusieurs études empiriques récentes fondées sur des modèles de concurrence monopolistique exhibent des élasticités prix estimées des échanges élevées (entre 3 et 11). Or, la plupart des élasticités prix estimées dans la littérature approchant les prix par des valeur unitaires sont plus faibles, de l'ordre de 1. Nous montrons que ces résultats non concluants pourraient provenir d'une mauvaise spécification des équations d'échanges ou d'erreurs de mesure sur les prix. Quand ceux-ci sont correctement instrumentés, sur un panel de pays industrialisés, nous obtenons des élasticités prix élevées (de 1 à 13). Les plus fortes correspondent aux secteurs produisant des biens homogènes.     

The import price index with trade barriers: theory and evidence

The standard economic import price index hinges on an assumption of free trade. Applying the index to situations with barriers to trade yields biased results compared to a true import price index. To circumvent this problem, it is common to use average prices, such as unit values, as an aggregator function. However, the use of average prices is not rooted in economic theory. In this paper, I generalise the economic import price index to allow for barriers to trade in the form of quantity constraints. To illustrate the theoretical framework, I use the case of imports of textiles to Norway from 1988 to 1997. I find that a standard economic import price index, such as the Laspeyres index, grossly overstates import costs and that this bias is significantly reduced by using unit values.