City CPI convergence in Mexico

This paper tests the purchasing power parity hypothesis within a single developing country currency area: Mexico. This work stems from research in comparing price movements across countries and a growing literature on price dynamics within a single currency area. The author uses city Consumer Price Index data for 34 cities in Mexico over the period 1982-2000. He followed the standard procedure of testing for I(1) processes in relative city prices, or city real exchange rates, using univariate and panel unit root tests. The main results of the paper are: First, Mexican city relative prices are stationary - the data rejects the hypothesis that city real exchange rates contain a random walk, but only using panel unit root techniques. Finally, regional demand and supply homogeneity implies stronger evidence for price parity within regions, while there is considerable evidence of regional price convergence, regional homogeneity does not guarantee faster convergence.