Persistence in Law-of-One-Price Deviations:
Evidence from Micro-data
Working Paper No. 02-W22R
Mario J. Crucini and Mototsugu Shintani
ABSTRACT [article]
We study the dynamics of good-by-good real exchange rates using a micro-panel of 270 goods prices drawn from major cities in 71 countries
and 245 goods prices drawn from 13 major U.S. cities. We find half-lives of
deviations from the Law-of-One-Price for the average good is about 1
year; somewhat lower for U.S. cities and somewhat higher for cities in the
OECD with LDC cities in between. This speed of adjustment is well below the
consensus range of estimates of 3 to 5 years for purchasing power parity
deviations yet consistent with plausible `price-stickiness.' We further
construct price indices using our micro data and find that aggregation
bias combined with small sample bias accounts for a large part of the
difference between micro and macro estimates for the OECD.