Heterogeneity in the persistence of relative prices: What do the Japanese cities tell us?

This paper employs diverse measures of persistence to analyze the convergence speed of intercity relative prices in Japan using consumer price subindices during 1970-2002. Regardless of the persistence measures, the median estimated half-lives are found to be less than two years in the vast majority of CPI items considered, which is compatible with economic models based on price rigidities. However, there exists a large heterogeneity in the persistence not just between tradable and nontradable items as is widely known, but within the categories of tradables or nontradables. The heterogeneity is substantive across cities in each CPI item as well. Our findings are robust to a subsample analysis though it points toward a presence of structural change around 1985. We conjecture that the extent of heterogeneity across CPI items is linked to the degree of tradability and market structure, while physical distance and relative city size may play some roles in the heterogeneity across cities.