Weak-form and strong-form purchasing power parity between the US and Mexico: A panel cointegration investigation

This study examines the long-run relationship between US and Mexican prices. We use panel cointegration techniques that allow for heterogeneous relationships across goods to examine the existence of weak-form and strong-form Purchasing Power Parity (PPP) between the US and Mexico. We construct and work with a panel of highly disaggregated data, matched prices of individual products sold in each country. Our findings provide overwhelming support for weak-form PPP, but less support for strong-form PPP. Strong-form PPP, though, emerges among actively-traded goods. In contrast, non-traded goods exhibit amplified reaction to price changes in Mexico relative to those from the US.