The Law of One Price: A New Econometric Approach and Evidence from Disaggregated Data

This paper contributes to the Law of One Price (LOP) and ab-solute Purchasing Power Parity (PPP) literature in two ways. First, it uses a novel set of PPP data from the International Comparison Programme for OECD countries and 195 internationally comparable products from 1980 to 1996. Second, it derives and applies a test of conditional σ-convergence, which by assumption does not require long time spans or high frequency data. Between 1990 and 1996 for 10 out of 23 countries a significant reduction in the variance of the deviations from LOP is found for tradeables, but none in case of non-tradeables. For the former, the deviations from LOP close out at half-lives be-tween 2.2 and 6.3 years. However, there are also persistent country specific deviations from LOP parities