Domestic market integration and the law of one price in Brazil

ABSTRACT

This article presents the first assessment of domestic market integration in Brazil using the law of one price. The law of one price is tested using two panel unit root methodologies and a unique data set comprising price indices for 51 products across 11 metro-areas. We find that the law holds for most tradable products and, not surprisingly, nontradable products are found to be less likely to satisfy the law of one price. While these findings are consistent with evidence found for other countries, price convergence occurs very slowly in Brazil, suggesting relatively limited domestic market integration.

KEYWORDS:

• Law of one price
• panel cointegration
• domestic market integration

JEL CLASSIFICATION:

• E31
• F15
• O54

Notes

¹ See, for instance, Li and Huang (2006), and Simon and Wei (2006).