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Noisy information, distance and law of one price dynamics across US cities

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  • Crucini, Mario J.
  • Shintani, Mototsugu
  • Tsuruga, Takayuki

Abstract

US micro price data at the city level suggests that both the volatility and the persistence of law of one price deviations are rising in the distance between US cities. A standard two-city equilibrium model with trade costs can predict the relationship between volatility and distance but not between persistence and distance. We show that if there is imperfect information about the state of nominal aggregate demand, with noisy signals that are asymmetric across cities, then distance and persistence will be positively correlated. Our main results are shown to be robust to the introduction of sticky prices and multiple cities.

Suggested Citation

  • Crucini, Mario J. & Shintani, Mototsugu & Tsuruga, Takayuki, 2015. "Noisy information, distance and law of one price dynamics across US cities," Journal of Monetary Economics, Elsevier, vol. 74(C), pages 52-66.
  • Handle: RePEc:eee:moneco:v:74:y:2015:i:c:p:52-66
    DOI: 10.1016/j.jmoneco.2015.06.003
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Mario Crucini & Anthony Landry & Craig Benedict, 2014. "On what states do prices depend? Answers from Ecuador," 2014 Meeting Papers 722, Society for Economic Dynamics.
    2. Choi, Chi-Young & Choi, Horag, 2016. "The role of two frictions in geographic price dispersion: When market friction meets nominal rigidity," Journal of International Money and Finance, Elsevier, vol. 63(C), pages 1-27.
    3. Ryo Okui & Takahide Yanagi, 2018. "Kernel Estimation for Panel Data with Heterogeneous Dynamics," Papers 1802.08825, arXiv.org, revised Mar 2018.
    4. Choi, Chi-Young & Choi, Horag, 2014. "Does distance reflect more than transport costs?," Economics Letters, Elsevier, vol. 125(1), pages 82-86.
    5. TAKECHI Kazutaka, 2016. "Daily Gravity," Discussion papers 16095, Research Institute of Economy, Trade and Industry (RIETI).
    6. Guo, Zi-Yi, 2017. "Information heterogeneity, housing dynamics and the business cycle," EconStor Preprints 168561, ZBW - German National Library of Economics.
    7. Guo, Zi-Yi, 2017. "Information heterogeneity, housing dynamics and the business cycle," Economics Discussion Papers 2017-17, Kiel Institute for the World Economy (IfW).

    More about this item

    Keywords

    Real exchange rates; Law of one price; Relative prices; Trade costs;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General

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