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Non-Linearities in International Prices

Author

Listed:
  • Inkoo Lee
  • Sang Soo Park
  • Marios Zachariadis

Abstract

We consider multiple sources of non-linearity at the same time within a structural model that accounts for previously omitted variables and allows estimation of product-level convergence rates both within and outside the band of no trade. Accounting for the role of theoretically-implied variables and their non-linear interactions in the convergence process, we find that good-level convergence rates are systematically faster as compared to convergence estimates from reduced-form models. Contrary to conventional wisdom, we find that good-level price differentials exhibit mean-reverting behavior even within the bands of no trade, and that rates of mean-reversion within or outside the no-trade band are strongly related to goods' economics characteristics. Furthermore, while implied trade costs dramatically increase as we move from within country comparisons to comparisons across countries, inconsistent with our priors services have somewhat comparable trade costs to tradable goods. Finally, wage differentials are negatively associated with the speed of price adjustment and this effect is stronger for city pairs that are farther apart.

Suggested Citation

  • Inkoo Lee & Sang Soo Park & Marios Zachariadis, 2018. "Non-Linearities in International Prices," University of Cyprus Working Papers in Economics 06-2018, University of Cyprus Department of Economics.
    • Handle: RePEc:ucy:cypeua:06-2018
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    References listed on IDEAS

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    More about this item

    Keywords

    law-of-one-price; threshold auto-regressive; structural estimation; convergence rates; trade costs;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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