Abstract
We adopt half-life deviations from purchasing power parity (PPP) and the law of one price (LOP) to measure price convergence and investigate whether prices converge after the integration of international goods markets. Engel and Rogers (2004) and Bergin and Glick (2007) find that pricedivergence occurs following such integration. Our results show that prices in more than two-fifths of the Eurozone country pairs converge to PPP after the launch of the euro, while there is no convergence to PPP among the members of NAFTA following the adoption of that free trade agreement. In addition, in about one-third of pairs of the Eurozone countries over 50% of prices converge to LOP after 1999. We find that in the remaining two-thirds about 10% to 50% of prices demonstrate a tendency of convergence to LOP. Similarly, when the US and Mexico are paired, more than half of prices converge to LOP after 1994. Therefore, the half-life estimates show that these prices converge after internationalgoods markets become more integrated. The confidence intervals cannot significantly reject price convergence. Finally, we find that the more trade-dependent two Eurozone countries become, the faster their prices will converge to PPP