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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 Unpublished manuscript].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. 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.
  2. Charles Engel & John H. Rogers, 1995. "How wide is the border?," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 498, Board of Governors of the Federal Reserve System (U.S.).
  3. Mario Crucini & Chris Telmer & Marios Zachariadis, 2005. "Price Dispersion: The Role of Distance, Borders and Location," 2005 Meeting Papers, Society for Economic Dynamics 767, Society for Economic Dynamics.
  4. 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, Royal Economic Society, vol. 117(523), pages 1336-1356, October.
  5. Atish R. Ghosh & Holger C. Wolf, 1994. "Pricing in International Markets: Lessons From The Economist," NBER Working Papers 4806, National Bureau of Economic Research, Inc.
  6. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," Boston College Working Papers in Economics, Boston College Department of Economics 593, Boston College Department of Economics.
  7. David C. Parsley & Shang-Jin Wei, 2000. "Explaining the Border Effect: The Role of Exchange Rate Variability, Shipping Costs, and Geography," NBER Working Papers 7836, National Bureau of Economic Research, Inc.
  8. Sanyal, Kalyan K & Jones, Ronald W, 1982. "The Theory of Trade in Middle Products," American Economic Review, American Economic Association, American Economic Association, vol. 72(1), pages 16-31, March.
  9. Weber, Axel A. & Beck, Guenter, 2003. "How wide are European borders? On the integration effects of monetary unions," CFS Working Paper Series 2001/07, Center for Financial Studies (CFS).
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Cited by:
  1. Jiří Schwarz, 2012. "Impact of institutions on cross-border price dispersion," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 148(4), pages 617-645, December.

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