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Do Regional Price Levels Converge?: Paneleconometric Evidence Based on German Districts

  • Christian Dreger
  • Reinhold Kosfeld

We investigate price index convergence on the base of regional data for 439 German districts. Prices refer to the overall consumer price index as well as to the index without housing prices. To increase the efficiency of the testing framework, a panel unit root analysis is performed, where cross section dependencies are taken into account. The tests indicate a lack of regional price convergence. While the idiosyncratic component of price differentials is mostly stationary, their common component is driven by a unit root. The results are very similar for the overall price index and the index without housing prices, and for the Western and Eastern part of the German economy. Obviously the elimination of housing prices is not sufficient to obtain a price index where tradable products dominate. One rationale of our findings is the persistent west-east divide in consumer prices. A second argument is related to the persistence of the price gradient between urban and rural regions.

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Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 754.

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Length: 17 p.
Date of creation: 2007
Date of revision:
Handle: RePEc:diw:diwwpp:dp754
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  1. Fabio Busetti & Silvia Fabiani & Andrew Harvey, 2006. "Convergences of prices and rates of inflation," Temi di discussione (Economic working papers) 575, Bank of Italy, Economic Research and International Relations Area.
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  3. Reinhold Kosfeld & Hans-Friedrich Eckey & Jorgen Lauridsen, 2008. "Disparities in Prices and Income across German NUTS 3 Regions," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot, Berlin, vol. 54(2), pages 123-141.
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  6. Gengenbach,Christian & Palm,Franz & Urbain,Jean-Pierre, 2004. "Panel Unit Root Tests in the Presence of Cross-Sectional Dependencies: Comparison and Implications for Modelling," Research Memorandum 040, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  7. Stephen Cecchetti & Nelson C. Mark & Robert Sonora, 1998. "Price Level Convergence Among United States Cities: Lessons for the European Central Bank," Working Papers 32, Oesterreichische Nationalbank (Austrian Central Bank).
  8. Culver, Sarah E. & Papell, David H., 1999. "Long-run purchasing power parity with short-run data: evidence with a null hypothesis of stationarity," Journal of International Money and Finance, Elsevier, vol. 18(5), pages 751-768, October.
  9. Jushan Bai & Serena Ng, 2001. "A PANIC Attack on Unit Roots and Cointegration," Boston College Working Papers in Economics 519, Boston College Department of Economics.
  10. Jushan Bai & Serena Ng, 2002. "Determining the Number of Factors in Approximate Factor Models," Econometrica, Econometric Society, vol. 70(1), pages 191-221, January.
  11. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
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