Do Regional Price Levels Converge?

We investigate price level convergence on the base of regional data for 439 German districts. Prices refer to the overall consumer price index as well as to the index without housing prices. To increase the efficiency of the testing framework, the analysis is based on panel unit root tests. First and second generation tests are applied. They indicate a lack of regional price convergence, as the null hypothesis of a unit root is usually not rejected. The second generation tests reveal that the source of the unit root is likely common for all regions. The results are very similar for the overall regional price level and the measure without housing prices, and for the Western and Eastern part of the German economy. The elimination of housing prices is not sufficient to obtain a price index where tradables dominate. One rationale of our findings is the persistent west-east divide in consumer prices. A second argument is related to the persistence of the price gradient between urban and rural regions.