Econometric Analyses of Linear and Nonlinear Price Convergence of Products in 72 Indian cities and its Impact on national Economy

Abstract

Abstract In exploring the inflation dynamics in India, the study employs different econometric techniques of price convergence test. Using a panel data of 72 cities covering the period of January 2003 to December 2016 across 17 product categories, the study finds that prices do tend to converge to the law of one price (LOP) in India. The study also estimates the half- lives for price convergence and finds a reasonable speed of convergence varying from two to twenty months with a median estimate of nine months. Moreover, the study divulges that transportation cost and rail networks throughout India appear to be significant determinants of price dispersion. The Exponential Smooth Transition Autoregressive (ESTAR) model reveals that 86% of the Indian city exhibit price convergence towards one price either in linear or nonlinear fashion. In summary, this empirical study provides strong evidence in favour of the view that regional markets have been increasingly integrating in India over time. JEL: C10, C50, E31, E60