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

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  • Stephen Cecchetti

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  • Nelson C. Mark

    ()

  • Robert Sonora

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.

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Bibliographic Info

Paper provided by Ohio State University, Department of Economics in its series Working Papers with number 99-01.

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Date of creation: Jan 1999
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Handle: RePEc:osu:osuewp:99-01

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