Relative Price Convergence among Pakistani Cities: Does the Choice of Numeraire City Matter?

Abstract

This study examines the price dynamics across seventeen cities in Pakistan, considering monthly disaggregated goods prices, and the convergence behavior among tradables and non-tradables. The results show overwhelming evidence of mean reversion of relative prices among cities. Varying across items, the speed of convergence is only a few months or less. Nevertheless, the results challenge some of the previous findings as the services which are considered as non-tradable items also reject the null of unit root with half-lives of less than a year. The empirical results of this study support the conjecture that intra-national prices converge faster than international prices. Greater tendency of convergence towards the Law of One Price implies high integration of Pakistani markets or perhaps low degree of specialization and market differentiation.