Munich Personal RePEc Archive

Price convergence and market integration: evidence from Malaysia

Lee, Chin and Habibullah, Muzafar Shah (2008): Price convergence and market integration: evidence from Malaysia. Published in: International Journal of Economics and Management , Vol. 2, No. 2 (2008): pp. 137-146.

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The purpose of this study is to assess the markets integration within Malaysia by examine the price convergence across Peninsular Malaysia, Sabah and Sarawak. Disaggregate monthly price data for various types of goods or services in Peninsular Malaysia, Sabah and Sarawak were utilized. Levin and Lin (1993) panel unit root test was employed to test whether the price of various types of goods among 3 provinces/states in Malaysia are stationary. The result of panel unit roots test showed that in more than half of the cases, we are able to reject the null hypothesis of unit root. In conclusion, we found considerable evidence of price convergence for majority of price groups in Malaysia. With regard to the degree of persistence of deviations from purchasing power parity after a shock, our empirical estimates showed a half-life of 6.75 years for Malaysia. Among the commodity/price groups, half-life for the tradable goods is roughly 1-2 years and for nontradable goods is about 10 years. The implication of price convergence in Malaysia is the evidence of increase market integration among Peninsular Malaysia, Sabah and Sarawak.

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