Working Paper: NBER ID: w5654
Authors: David C. Parsley; Shang-Jin Wei
Abstract: Using a panel of 51 prices from 48 cities in the United States we provide an upper bound estimate of the rate of convergence to Purchasing Power Parity. We find convergence rates substantially higher than typically found in cross-country data. We investigate some potentially serious biases induced by i.i.d. measurement errors in the data, and find our estimates to be robust to these potential biases. We also present evidence that convergence occurs faster for larger price differences. Finally, we find that rates of convergence are slower for cities farther apart. However, our estimates suggest that distance alone can only account for a small portion of the much slower convergence rates across national borders.
Keywords: purchasing power parity; price convergence; trade barriers; exchange rate; empirical analysis
JEL Codes: F31; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Distance (R12) | Convergence Rates (O47) |
| Tax Rates (H29) | Convergence Rates (O47) |
| Price Differences (P22) | Convergence Rates (O47) |
| Nature of Goods (L14) | Convergence Rates (O47) |
| Distance (R12) | Price Differences (P22) |