Price-Level-Convergence of Food Baskets in Mexican Cities:Inflation-Targeting and PPP

Resumen

We investigate relative price convergence under Inflation Targeting in Mexico from January 2010 to March 2018. A panel of 46 rural and urban cities shows half-lives ranging from 0.70 to 3.10 months. We find an increase in the speed of convergence during the period of U.S. monetary normalization. We also find a positive response of price variation to measures of distance and a slower speed of adjustment between cities of greater distance, suggesting that transportation costs are not necessarily a barrier to arbitrage opportunities. While univariate tests suggest that not all cities converge to the same long-run trend, panel unit root tests accounting for cross-sectional dependence favor the relative convergence of food prices. Beta convergence estimates suggest disparities in the cost of food baskets.