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A Re-Examination of the Border Effect

Author

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  • Yuriy Gorodnichenko

    (University of Michigan)

  • Linda Tesar

    (University of Michigan)

Abstract

This paper reexamines the evidence on the border effect, the finding that the border drives a wedge between domestic and foreign prices. We argue that the border effect can be inflated by the volatility and persistence of the nominal exchange rate and by the cross-country heterogeneity in the distribution of within-country price differentials. We develop a simple framework to separate the border effect from these confounding factors. Using price data from Engel and Rogers (1996) and Parsley and Wei (2001), we show that after controlling for the confounding factors the border effect between the U.S. and Canada and the U.S. and Japan is negligible.

Suggested Citation

  • Yuriy Gorodnichenko & Linda Tesar, 2005. "A Re-Examination of the Border Effect," Working Papers 546, Research Seminar in International Economics, University of Michigan.
    • Handle: RePEc:mie:wpaper:546
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    References listed on IDEAS

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    Cited by:

    1. Grafe, Clemens & Raiser, Martin & Sakatsume, Toshiaki, 2008. "Beyond borders--Reconsidering regional trade in Central Asia," Journal of Comparative Economics, Elsevier, vol. 36(3), pages 453-466, September.
    2. Yin-Wong Cheung & Kon Lai, 2006. "A Reappraisal of the Border Effect on Relative Price Volatility," International Economic Journal, Taylor & Francis Journals, vol. 20(4), pages 495-513.
    3. Bruno Versailles, 2012. "Market Integration and Border Effects in Eastern Africa," Economics Series Working Papers WPS/2012-01, University of Oxford, Department of Economics.
    4. Bruno Versailles, 2012. "Market Intergration and Border Effects in Eastern Africa," CSAE Working Paper Series 2012-01, Centre for the Study of African Economies, University of Oxford.

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    JEL classification:

    • F3 - International Economics - - International Finance
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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