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

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

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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File URL: http://www.nber.org/papers/w7681.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7681.

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Date of creation: May 2000
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Publication status: published as 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.
Handle: RePEc:nbr:nberwo:7681
Note: ME
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