DP3320 The Behaviour of Relative Prices in the European Union: A Sectoral Analysis

Author(s): Natalie Chen
Publication Date: April 2002
Keyword(s): LOOP, mean reversion, multivariate unit root tests, persistence, PPP
JEL(s): C23, F31, F41
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3320

Using multivariate unit root test methods, this Paper investigates the Purchasing Power Parity (PPP) hypothesis at the sectoral level across six European countries over the last seventeen years. Evidence of mean reversion toward PPP is found for the relative prices of some sectors and countries. Mean reversion in relative prices is explained by cross-country and cross-sectoral characteristics such as the distance between countries, nominal exchange rate volatility, differences in GDP per capita, non-tariff barriers, research and development, advertising, industrial concentration and tradability of the products.