Price Convergence and Market Integration: Evidence from Malaysia

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. The empirical evidence suggests that there is a 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 results 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.