Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/22907 
Year of Publication: 
2004
Series/Report no.: 
Bonn Econ Discussion Papers No. 1/2005
Publisher: 
University of Bonn, Bonn Graduate School of Economics (BGSE), Bonn
Abstract: 
The paper attempts to examine whether there is price convergence across various regions in India. Our results indicate significant presence of cross-sectional de- pendence in prices in India, rendering some of the standard panel unit root tests inapplicable. Using various panel unit root tests that are robust to cross-sectional dependence, it is found that relative price levels among various regions in India mean-revert. We decompose each series into a set of common factors and idiosyn- cratic components. The decomposition enables us to test stationarity and estimate half-lives of the common factors and the idiosyncratic components separately. Both these components in case of India are found to be stationary. Idiosyncratic price shocks, however, are found to be more persistent as compared to the common factor. The results also indicate that transportation costs proxied by distance can explain a part of the variation in prices between two locations in India.
Subjects: 
Cross co-integration
Cross-sectional dependence
Panel unit root tests
Common factor
Price convergence
JEL: 
E31
C23
Document Type: 
Working Paper

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