Price Index Convergence in Iran Provinces

Lower level of trade and non-trade barriers between different regions of a country raises the possibility of purchasing power parity theory and the law of one price within an intra-national context. Of course, it is possible due to economic and geographical conditions, the prices also be affected by local shocks. Therefore, it leads to the question "whether there is price convergence between different provinces and if any local shocks, what will be the half-life of convergence of provincial price indices? In this paper, we examine the convergence of the consumer price index across Iran provinces using panel unit root test and monthly data during 2002-2011. The results indicate that the convergence of provinces price indices depends on the choice of the numéraire province and by deviations from the law of one price based on a local shock, the convergence of half-life would be about 1.5 years.