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The border effect in small open economies

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  • Horváth, Julius
  • Rátfai, Attila
  • Döme, Botond

Abstract

This paper examines the importance of the national border in relative price variability in two neighboring, small open economies. Using monthly frequency price data of narrowly defined, homogenous consumer products, it finds that the time-series variation in within-country relative prices is about the same in the two countries. After controlling for distance, relative price variation is significantly higher across than within countries. The border is the dominant determinant of relative prices, even after accounting for nominal exchange rate variability and local culture as represented by language spoken. Our estimates of the border effect are largely immune to the bias identified in Gorodnichenko and Tesar [Gorodnichenko, Y., Tesar, L., 2006. Border effect or country effect? Seattle is 110Â miles from Vancouver after all. Unpublished manuscript].

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Bibliographic Info

Article provided by Elsevier in its journal Economic Systems.

Volume (Year): 32 (2008)
Issue (Month): 1 (March)
Pages: 33-45

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Handle: RePEc:eee:ecosys:v:32:y:2008:i:1:p:33-45

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  1. Parsley, David C. & Wei, Shang-Jin, 2001. "Explaining the border effect: the role of exchange rate variability, shipping costs, and geography," Journal of International Economics, Elsevier, vol. 55(1), pages 87-105, October.
  2. DavidC. Parsley & Shang-Jin Wei, 2007. "A Prism into the PPP Puzzles: The Micro-Foundations of Big Mac Real Exchange Rates," Economic Journal, Royal Economic Society, vol. 117(523), pages 1336-1356, October.
  3. Yuriy Gorodnichenko & Linda L. Tesar, 2009. "Border Effect or Country Effect? Seattle May Not Be So Far from Vancouver After All," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 219-41, January.
  4. Engel, Charles & Rogers, John H, 1996. "How Wide Is the Border?," American Economic Review, American Economic Association, vol. 86(5), pages 1112-25, December.
  5. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," Journal of Economic Literature, American Economic Association, vol. 42(3), pages 691-751, September.
  6. Atish R. Ghosh & Holger C. Wolf, 1994. "Pricing in International Markets: Lessons from The Economist," Working Papers 94-21, New York University, Leonard N. Stern School of Business, Department of Economics.
  7. Mario Crucini & Chris Telmer & Marios Zachariadis, 2003. "Price dispersion: The role of distance, borders and location," GSIA Working Papers 2004-E25, Carnegie Mellon University, Tepper School of Business.
  8. Sanyal, Kalyan K & Jones, Ronald W, 1982. "The Theory of Trade in Middle Products," American Economic Review, American Economic Association, vol. 72(1), pages 16-31, March.
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Cited by:
  1. Jiøí Schwarz, 2011. "Impact of Institutions on Cross-Border Price Dispersion," Working Papers IES 2011/30, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Sep 2011.

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