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

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) 63 1] 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 nonstationary 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. (C) 2002 Elsevier Science B.V. All rights reserved.