Regional price levels in Germany

Abstract

Cross-sectional evidence on price levels is scarce for all countries. However, several studies suggest that there might exist considerable differences in price levels within countries, which has obvious welfare implications. A sample of price levels in 50 German cities in 1993 is used to analyse the determinants of inter-city price level differentials. The most important explanatory variables for price level differentials are population size and density and the average wage level. Using this information, the price levels are predicted in all 440 German districts and aggregated to the state level. At the state level convergence of the price levels to a common mean is found, but at a very low speed. The estimated half-life is about 19 years.

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