What can US city price data tell us about purchasing power parity?

We study the dispersion of absolute price levels for US cities since 1918. By absolute price levels, we mean price indices that measure the cost of a given consumption basket at each point in time. We find strong evidence that city price levels converge over time and that the dispersion of price levels is lower for US cities than between OECD countries. We argue that price level convergence for US cities will produce bilateral real exchange rate nonstationarity. In this case, however, nonstationarity is not evidence against Purchasing Power Parity (PPP), rather it is the consequence of improved market integration. (C) 2003 Elsevier Science Ltd. All rights reserved.