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

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  • 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)

Abstract

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.

Suggested Citation

  • Hiranya K. Nath & Natalie Hegwood, 2012. "Structural Breaks and Relative Price Convergence among U.S. Cities," Working Papers 1204, Sam Houston State University, Department of Economics and International Business.
    • Handle: RePEc:shs:wpaper:1204
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    Cited by:

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    4. Felipe S. Bastos & Elano F. Arruda & Rafael B. Barbosa & Roberto T. Ferreira, 2018. "Speed of Reversion to PPP with Structural Breaks for Brazilian Cities," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 10(4), pages 15-24, April.
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    6. Yilmazkuday, Hakan, 2023. "Drivers of inflation convergence across countries: the role of standard gravity variables," Macroeconomic Dynamics, Cambridge University Press, vol. 27(6), pages 1664-1686, September.
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    10. Chiang, Shu-Hen & Lee, Chien-Chiang & Liao, Ying, 2021. "Exploring the sources of inflation dynamics: New evidence from China," Economic Analysis and Policy, Elsevier, vol. 70(C), pages 313-332.
    11. Bastos, Felipe de Sousa & Ferreira, Roberto Tatiwa & Arruda, Elano Ferreira, 2018. "Speed of Reversion of Deviations of the Purchasing Power Parity for Brazilian Cities," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 72(1), February.
    12. Kazunobu Hayakawa & Ikumo Isono & Satoru Kumagai, 2020. "Transportation Costs in Archipelagos: Evidence from Indonesia," The Developing Economies, Institute of Developing Economies, vol. 58(3), pages 227-241, September.
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    14. Liu, Tie-Ying & Lee, Chien-Chiang, 2021. "Global convergence of inflation rates," The North American Journal of Economics and Finance, Elsevier, vol. 58(C).

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