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Border Effect or Country Effect? Seattle May Not Be So Far from Vancouver After All

  • Yuriy Gorodnichenko
  • Linda L. Tesar

This paper reexamines the evidence on the border effect. We argue that if there is cross-country heterogeneity in the distribution of within-country price differentials, there is no clear benchmark from which to gauge the effect of a border. In the absence of a structural model or a (natural) experiment, it is impossible to separate the "border" effect from the effect of trading with a country with a different distribution of prices. We show that the border effect identified by Engel and Rogers (1996) is entirely driven by the difference in the distribution of prices within the United States and Canada. (JEL F11, F14)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/mac.1.1.219
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File URL: http://www.aeaweb.org/aej/mac/data/2007-0050_data.zip
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Article provided by American Economic Association in its journal American Economic Journal: Macroeconomics.

Volume (Year): 1 (2009)
Issue (Month): 1 (January)
Pages: 219-41

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Handle: RePEc:aea:aejmac:v:1:y:2009:i:1:p:219-41
Note: DOI: 10.1257/mac.1.1.219
Contact details of provider: Web page: https://www.aeaweb.org/aej-macro
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  1. James E. Anderson & Eric van Wincoop, 2000. "Gravity with Gravitas: A Solution to the Border Puzzle," Boston College Working Papers in Economics 485, Boston College Department of Economics.
  2. 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.
  3. John F. Helliwell & Geneviève Verdier, 2001. "Measuring internal trade distances: a new method applied to estimate provincial border effects in Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 34(4), pages 1024-1041, November.
  4. Mahbub Morshed, A.K.M., 2007. "Is there really a "border effect"?," Journal of International Money and Finance, Elsevier, vol. 26(7), pages 1229-1238, November.
  5. Janet Ceglowski, 2003. "The law of one price: intranational evidence for Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 36(2), pages 373-400, May.
  6. Holger C. Wolf, 2000. "Intranational Home Bias In Trade," The Review of Economics and Statistics, MIT Press, vol. 82(4), pages 555-563, November.
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