Constructing price indexes across space and time: the case of the European Union

This paper considers the problem of how to construct and reconcile price indexes across space and time. Six methods for constructing price indexes on a panel are proposed along with five criteria for discriminating between them. Using these methods, spatial and temporal price indexes are computed for the 15 countrie s of the European Union (EU) over the period 1995-2000 using a panel data set constructed by merging, at a low level of aggregation, the EU’s Harmonized Index of Consumer Prices (HICP) with a cross-section of OECD data. These panel price indexes are then used to test whether or not price levels and relative prices converged across the EU over this period.