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

Abstract

We study the dynamics of price indices for major U.S. cities using panel econometric methods. We ¯nd that relative price levels among cities mean revert, but at a surprisingly slow rate. In a panel of 19 cities from 1918 to 1995, we estimate the half-life of convergence to be approximately 9 years. These estimates provide an upper bound on speed of convergence that participants in European Monetary Union are likely to experience. The surprisingly slow rate of convergence cannot be explained by either the presence of transportation costs or by the inclusion of nontraded goods prices in the overall price index.

Keywords: Purchasing power parity, Convergence, European Monetary Union