Investigating Price Index Convergence among Iran Provinces with Emphasizing on Cluster Analysis

This paper aims to test the hypothesis of consumer price index convergence among Iran provinces over the period from 2003 to 2016 by implementing cluster analysis and panel unit root test. Studying the price index convergence is important in several ways. First, CPI convergence is equivalent in some ways to the convergence of the cost of living across the provinces because CPI is the most commonly used, while not perfect, measure of the cost of living. Second, rejection of price convergence may imply the existence of probable structural problems or significant economic development differences among provinces. Third, price convergence issue could be viewed as a part of the comprehensive plan of balanced regional development. The results of the cluster analysis show that there is no evidence of overall convergence among all provinces. However, the results suggest that there are three convergence clubs and one divergent club (Tehran province). The clubs consist of 19,3, and 4 provinces. Lack of overall price convergence among provinces is also confirmed by panel unit root test. Moreover, the findings indicate the price divergence is related to the prices common factor. So government policies have a more important role in price divergence compared to the local shocks. The estimated half-life of convergence is approximately 17 months.