Does the law of one price hold in 82 Indonesian cities? Evidence from a club convergence approach

Saturday, Nov 7, 2020| Tags: Economics Bulletin

This study re-examines regional price convergence across 82 cities in Indonesia. We implement club convergence analysis developed by Phillips and Sul (2007, 2009) on monthly aggregate consumer price data and its components from January 2014 to December 2019. We do not find evidence of overall convergence in aggregate consumer price data. Instead, we identify four club convergence. Using disaggregated data, four new outcomes arise; first, none of the consumer price components show overall convergence but multiple club convergence do exist, second, there is variability in the number and composition of clubs among consumer price components, third, the price of foodstuffs and education-related commodities in most cities converge to the higher level, and fourth, the formation of club convergence in aggregate price is attributed largely by housing, processed foods, transport, and health components. Policy insights include improving market efficiency and controlling the inflation rate in targeted consumer price components and locations.

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