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Border, Border, Wide and Far, How We Wonder What You Are

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  • David C. Parsley
  • Shang-Jin Wei

Abstract

This paper exploits a three-dimensional panel data set of prices on 27 traded goods, over 88 quarters, across 96 cities in the U.S. and Japan. We present evidence that the distribution of intra-national real exchange rates is substantially less volatile and on average closer to zero, than the comparable distribution for international relative prices. We also show that an equally-weighted average of good-level real exchange rates tracks the nominal exchange rate well, suggesting strong evidence of sticky prices. We turn next to economic explanations for the dynamics of this so-called "Border" effect. Focusing on dispersion in prices between city pairs, we confirm previous findings that crossing national borders adds significantly to price dispersion. Using our point estimates crossing the U.S.-Japan "Border" is equivalent to adding between 2.5 and 13 million miles to the cross-country volatility of relative prices. We make a direct and explicit inference on the influence of shipping costs, distance, exchange rate and relative wage variability on the "Border" effect. In our calculations, the "Border" effect disappears after controlling for these additional variables.

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Bibliographic Info

Paper provided by Center for International Development at Harvard University in its series CID Working Papers with number 25.

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Date of creation: Sep 1999
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Handle: RePEc:wop:cidhav:25

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Web page: http://www.cid.harvard.edu/cidwp/
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  1. David C. Parsley & Shang-Jin Wei, 1996. "Convergence to the Law of One Price Without Trade Barriers or Currency Fluctuations," NBER Working Papers 5654, National Bureau of Economic Research, Inc.
  2. Froot, Kenneth A. & Rogoff, Kenneth, 1995. "Perspectives on PPP and long-run real exchange rates," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 32, pages 1647-1688 Elsevier.
  3. Jeffrey A. Frankel and Andrew K. Rose., 1995. "A Panel Project on Purchasing Power Parity: Mean Reversion Within and Between Countries," Center for International and Development Economics Research (CIDER) Working Papers C95-052, University of California at Berkeley.
  4. Charles Engel & John H. Rogers, 1994. "How Wide is the Border?," NBER Working Papers 4829, National Bureau of Economic Research, Inc.
  5. McCallum, John, 1995. "National Borders Matter: Canada-U.S. Regional Trade Patterns," American Economic Review, American Economic Association, vol. 85(3), pages 615-23, June.
  6. Engel, Charles, 1993. "Real exchange rates and relative prices : An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 32(1), pages 35-50, August.
  7. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584.
  8. Paul G. J. O'Connell & Shang-Jin Wei, 1997. ""The Bigger They Are, The Harder They Fall": How Price Differences Across U.S. Cities Are Arbitraged," NBER Working Papers 6089, National Bureau of Economic Research, Inc.
  9. Shang-Jin Wei, 1996. "Intra-National versus International Trade: How Stubborn are Nations in Global Integration?," NBER Working Papers 5531, National Bureau of Economic Research, Inc.
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