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Sectoral Price Divergence between Korea and Japan

Author

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  • Moon, Seongman

    (Chonbuk National University)

Abstract

This paper examines the persistent properties of 12 sectoral relative prices between Korea and Japan obtained following the Classification of Individual Consumption according to Purpose (COICOP) over the period of 1985-2016. Applying a new econometric method developed by Pesaran which controls for the cross-section dependence in a panel, we are not able to reject the hypothesis that the sectoral real exchange rates contain a common stochastic trend. On the other hand, the well-known panel unit root tests such as the IPS and LLC tests widely used by previous studies strongly reject the unit root hypothesis. Since the error term of the regression for our panel exhibits significant cross-section dependence, these opposite results justify that the use of the new econometric method is appropriate.

Suggested Citation

  • Moon, Seongman, 2016. "Sectoral Price Divergence between Korea and Japan," East Asian Economic Review, Korea Institute for International Economic Policy, vol. 20(4), pages 493-517, December.
    • Handle: RePEc:ris:eaerev:0004
    DOI: 10.11644/KIEP.EAER.2016.20.4.319
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    Keywords

    PPP; Cross-section Dependence; Panel Unit Root Tests; Real Exchange Rates; Sectoral Price Indices;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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