NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

Stephen G. Cecchetti, Nelson C. Mark, Robert J. Sonora

NBER Working Paper No. 7681
Issued in May 2000
NBER Program(s):   ME

We study the dynamics of price indices for major U.S. cities using panel econometric methods and find that relative price levels among cities mean revert at an exceptionally slow rate. In a panel of 19 cities from 1918 to 1995, we estimate the half-life of convergence to be approximately nine 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 can be explained by a combination of the presence of transportation costs, differential speeds of adjustment to small and large shocks, and the inclusion of non-traded good prices in the overall price index.

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Document Object Identifier (DOI): 10.3386/w7681

Published: Cecchetti, Stephen G., Nelson C. Mark and Robert J. Sonora. "Price Index Convergence Among United States Cities," International Economic Review, 2002, v43(4,Nov), 1081-1099.

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