City Relative Price Dynamics in Australia: Are Structural Breaks Important?

Authors

  • Hiranya K. Nath,

    Corresponding author
    1. Department of Economics and International Business, Sam Houston State University, Huntsville, TX, USA
    • Correspondence: Hiranya K. Nath, Department of Economics and International Business, Sam Houston State University, SHSU Box 2118, Huntsville, TX 77341-2118, USA. Email: eco_hkn@shsu.edu

    Search for more papers by this author
  • Jayanta Sarkar

    1. School of Economics and Finance, QUT Business School, Queensland University of Technology, Brisbane, QLD, Australia
    Search for more papers by this author

  • The authors would like to thank two anonymous referees and the editor, Jeffrey Sheen, for their useful comments and suggestions on an earlier draft. This paper was written when Nath was a visiting fellow at QUT. He is grateful to the QUT School of Economics and Finance for its hospitality and financial support.

Abstract

This paper examines the dynamic behaviour of relative prices across seven Australian cities by applying panel unit root test procedures with structural breaks to quarterly consumer price index data for 1972 Q1–2011 Q4. We find overwhelming evidence of convergence in city relative prices. Three common structural breaks are endogenously determined at 1985, 1995, and 2007. Further, correcting for two potential biases, namely Nickell bias and time aggregation bias, we obtain half-life estimates of 2.3–3.8 quarters that are much shorter than those reported by previous research. Thus, we conclude that both structural breaks and bias corrections are important to obtain shorter half-life estimates.

Ancillary