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Structural Breaks and Relative Price Convergence among U.S. Cities

  • Hiranya K. Nath

    ()

    (Department of Economics and International Business, Sam Houston State University)

  • Natalie Hegwood

    ()

    (Department of Economics and International Business, Sam Houston State University)

This paper examines price index convergence among U. S. cities by applying panel unit root test procedures that allow for structural breaks to annual CPI data between 1918 and 2010 for 17 major cities. With an endogenously determined single break in 1985, and two breaks in 1943 and 1990 respectively, the test results provide overwhelming evidence of convergence of relative prices across cities, which is consistent with the existing literature. Most importantly, this study finds that the speed of convergence with structural break(s) is much faster than that reported by previous panel studies with no structural break. Furthermore, correcting for small-sample bias (the so-called “Nickell Bias”) and time aggregation bias generates a half-life of 2.8 years with two breaks, which is 74% shorter than the half-life estimate with no structural break and no bias correction. These results highlight the importance of structural break(s) and bias correction in obtaining reasonable panel estimates of the half-life to relative price convergence among U. S. cities.

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Paper provided by Sam Houston State University, Department of Economics and International Business in its series Working Papers with number 1204.

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Date of creation: Aug 2012
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Handle: RePEc:shs:wpaper:1204
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