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

28 Pages Posted: 18 May 2000 Last revised: 17 Oct 2010

See all articles by Stephen G. Cecchetti

Stephen G. Cecchetti

Brandeis International Business School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Nelson C. Mark

University of Notre Dame - Department of Economics and Econometrics; National Bureau of Economic Research (NBER)

Robert J. Sonora

Univeristy of Montana

Date Written: May 2000

Abstract

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.

Suggested Citation

Cecchetti, Stephen G. and Mark, Nelson Chung and Sonora, Robert J., Price Level Convergence Among United States Cities: Lessons for the European Central Bank (May 2000). NBER Working Paper No. w7681. Available at SSRN: https://ssrn.com/abstract=228154

Stephen G. Cecchetti (Contact Author)

Brandeis International Business School ( email )

415 South Street
Waltham, MA 02453
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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212-720-8629 (Phone)
212-720-2630 (Fax)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Nelson Chung Mark

University of Notre Dame - Department of Economics and Econometrics ( email )

442 Flanner
Notre Dame, IN 46556
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Robert J. Sonora

Univeristy of Montana ( email )

Missoula, MT 59812
United States

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