Price Level Convergence Among United States Cities: Lessons for the European Central Bank

Stephen Cecchetti, Nelson Mark and Robert Sonora

Working Papers from Oesterreichische Nationalbank (Austrian Central Bank)

Abstract: We study the dynamics of price indices for major U.S. cities. Using panel econometric methods, we find that relative price levels among cities mean revert, but at a surprisingly slow rate. In a panel of 15 cities from 1918 to 1995, we estimate the half life of convergence to be approximately 9 years. The following hypotheses are investigated as explanations for the slow convergence: (i) Arbitrage impediments induced by transportation costs, and (ii) and the inclusion of nontraded goods prices in the overall price index as suggested by the Balassa-Samuelson hypothesis. Our estimates provide an upper bound on convergence rates that participants in European Monetary Union may experience.

Keywords: Purchasing power parity; Convergence; European Monetary Union (search for similar items in EconPapers)
Pages: 34
Date: 1998-07-30
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Citations: View citations in EconPapers (17)

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Related works:
Working Paper: Price Level Convergence Among United States Cities: Lessons for the European Central Bank (2000)
Working Paper: Price Level Convergence Among United States Cities: Lessons for the European Central Bank (1999)
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