Viera Chmelarova, Ph.D. and Hiranya K. Nath, Ph.D. Department of Economics and Int'l. Business, Sam Houston State University, P.O.Box 2118, Huntsville, TX 77341-2118
This paper examines if the choice of numeraire city has any implication for the behavior of relative prices in seventeen major cities across the U. S. by conducting panel unit root tests on city level CPI data that span a period from 1918 to 2006. Using a panel unit root test procedure that takes into account cross sectional correlation suggested by Phillips and Sul (2003) we find evidence of price index convergence across U. S. cities irrespective of the choice of the numeraire city. However, corrected for small sample bias (Nickell bias) and time aggregation bias, the estimates of half-lives differ significantly depending on the choice of the numeraire city. Preliminary results show that while the speed of convergence is extremely slow when we use Cleveland as the numeraire city (more than 11 years) it is relatively faster when we use St. Louis as the numeraire city (7 years).