Persistence in Law-of-One-Price Deviations:
Evidence from Micro-data
Working Paper No. 06-W16
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 63 countries
and 258 goods prices drawn from 13 major U.S. cities. We find the
half-life of deviations from the Law-of-One-Price for the average good is
about 1 year. The average half-life is very similar across the OECD, the
LCD and within the U.S., suggesting little in the way of nominal exchange
rate regime influences. The average non-traded good has a half-life of 1.9
years compared to 1.2 years for traded-goods, for the OECD, with modest
differences elsewhere. Aggregating the micro-data increases persistence
in the OECD by 6 months to 1.5 years, well below levels obtained using
aggregate CPI data. We attribute these differences to conceptual and
methodological factors and argue in favor of increased use of micro-price
data in applied theory.