Bivariate relative city price convergence in the United States: 1918–1997 ☆ Robert J. Sonora ⁎ Department of Economics, School of Business Administration, Fort Lewis College, Durango, 81303 CO, United States Received 18 September 2005; received in revised form 31 January 2007; accepted 19 February 2007 Available online 19 March 2007 Abstract As in international tests of purchasing power parity, panel unit root tests have been successful in rejecting a unit root process in U.S. city relative prices over the period 1918–1997. However, there is an empirical question of what the rejection of a ‘panel unit root’, particularly with respect to real exchange rates, means. This paper employs a variety of univariate unit root and cointegration tests which have recently come to the fore. These tests improve the power and reduce size distortion found in standard unit root and cointegration tests such as the Dickey–Fuller and Phillips–Perron tests. I find considerable evidence for rejecting a unit root process in the majority of U.S. city relative prices over the entire sample period and two subperiods. Less successful are stationarity tests conducted on regions of the U.S. © 2007 Elsevier Inc. All rights reserved. JEL classification: E31; F22 Keywords: Price index convergence; Purchasing power parity; Unit root tests; Cointegration 1. Introduction This paper investigates relative price level convergence within a single currency area, the United States. This is motivated by the relative lack of success of empirical research in real exchange rate Review of Financial Economics 17 (2008) 92 – 111 www.elsevier.com/locate/econbase ☆ This is an updated version of a paper first presented at the Western Economic International annual conference in Seattle, WA, July 2002. I would like to thank the participants for their helpful comments, in particular John Devereux. Discussions with Bill Crowder and comments from an anonymous referee were also beneficial. Any mistakes are mine and mine alone. ⁎ Tel. +1 970 247 7296. E-mail address: Sonora_t@fortlewis.edu. 1058-3300/$ - see front matter © 2007 Elsevier Inc. All rights reserved. doi:10.1016/j.rfe.2007.02.010