Non-linearities in International Prices
Park, Sang Soo
SourceCanadian Journal of Economics
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We consider multiple sources of non-linearity in good-level law-of-one-price deviations across the globe using a structural model that accounts for previously omitted variables and allows estimation of good-level convergence rates both within and outside the bands of no trade. Accounting for the role of theoretically implied variables and their non-linear interactions in the convergence process of law-of-one-price deviations, we ﬁnd that good-level convergence rates are systematically faster compared with convergence estimates based on reduced-form models. Contrary to conventional wisdom, good-level price diﬀerentials exhibit mean-reverting behaviour even within the bands of no trade. Moreover, mean-reversion rates are strongly related to economic characteristics such as tradability and a good’s non-traded input content.