Panel unit root tests of purchasing power parity between Japanese cities, 1960–1998: disaggregated price data

Abstract

This paper makes use of new panel unit root tests of Im et al. [Testing for unit roots in heterogeneous panels, Working paper, Department of Applied Economics, University of Cambridge, 1997], and Maddala and Wu [Oxford Bull. Econ. Stat. 61 (1999) 631] to examine whether long-run purchasing power parity (PPP) holds between major Japanese cities. By using a panel of 13 disaggregated consumer price indices from seven cities in Japan over the period 1960–1998, we are able to reject the null hypothesis that the relative price of goods between Japanese cities is non-stationary at the 5 percent level for all eight tradable goods and in two of the five non-tradable goods. Hence, we conclude that long-run PPP holds between major Japanese cities and PPP holds more for tradable goods than for non-tradable goods.