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Understanding Long-run Price Dispersion

  • Mario J. Crucini
  • Hakan Yilmazkuday

We use a unique panel of retail prices spanning 123 cities in 79 countries from 1990 to 2005, to uncover six novel properties of long-run international price dispersion. First, at the PPP level, virtually all (91.6%) of price dispersion is attributed to service-sector wages, consistent with a dominant role of the retail distribution margin. Second, at the level of individual goods and services, the average contribution of service-sector wages is significantly reduced, one-third as large (31.9%). This reflects the fact that goodspecific sources of price dispersion, such as trade costs and good-specific markups, tend to average out across goods. Third, at the LOP level, borders and distance contribute about equally to price dispersion with distance elasticities consistent with the existing trade gravity literature which links trade volumes (rather than relative prices) to borders and distance. Fourth, in the cross-section, price dispersion is rising in the distribution share consistent with the notion that baby-sitting services and haircuts embody local wages to a far greater extent than highly traded manufactured goods. Fifth, we provide the first estimates of distribution margins at the micro-level and show them to be very different across goods and substantial in the aggregate, where they account for about 55% of consumption expenditure. Sixth, these estimates are broadly consistent with more aggregated U.S. NIPA measures currently used in the literature.

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File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2013-08/57_2013_crucini_yilmazkuday.pdf
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Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2013-57.

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Length: 39 pages
Date of creation: Sep 2013
Date of revision:
Handle: RePEc:een:camaaa:2013-57
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  1. Berthold Herrendorf & Akos Valentinyi, 2006. "Which Sectors Make the Poor Countries so Unproductive?," 2006 Meeting Papers 304, Society for Economic Dynamics.
  2. Peter Kennedy, 2003. "A Guide to Econometrics, 5th Edition," MIT Press Books, The MIT Press, edition 5, volume 1, number 026261183x, June.
  3. Burstein, Ariel Tomas & Eichenbaum, Martin & Rebelo, Sérgio, 2004. "Large Devaluations and the Real Exchange Rate," CEPR Discussion Papers 4810, C.E.P.R. Discussion Papers.
  4. Ariel Burstein & Martin Eichenbaum & Sergio Rebelo, 2005. "Modeling Exchange Rate Passthrough After Large Devaluations," RCER Working Papers 514, University of Rochester - Center for Economic Research (RCER).
  5. Charles Engel & John H. Rogers, 1994. "How Wide is the Border?," NBER Working Papers 4829, National Bureau of Economic Research, Inc.
  6. Mario J. Crucini & Mototsugu Shintani, 2006. "Persistence in Law-Of-One-Price Deviations: Evidence from Micro-Data," Vanderbilt University Department of Economics Working Papers 0616, Vanderbilt University Department of Economics.
  7. Mario J. Crucini & Chris I. Telmer & Marios Zachariadis, 2005. "Understanding European Real Exchange Rates," American Economic Review, American Economic Association, vol. 95(3), pages 724-738, June.
  8. Burstein, Ariel T. & Neves, Joao C. & Rebelo, Sergio, 2003. "Distribution costs and real exchange rate dynamics during exchange-rate-based stabilizations," Journal of Monetary Economics, Elsevier, vol. 50(6), pages 1189-1214, September.
  9. Hakan Yilmazkuday & Mario Crucini, 2009. "A Model of International Cities: Implications for Real Exchange Rates," 2009 Meeting Papers 1271, Society for Economic Dynamics.
  10. George Alessandria & Joseph P. Kaboski, 2011. "Pricing-to-Market and the Failure of Absolute PPP," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(1), pages 91-127, January.
  11. Sanyal, Kalyan K & Jones, Ronald W, 1982. "The Theory of Trade in Middle Products," American Economic Review, American Economic Association, vol. 72(1), pages 16-31, March.
  12. Mario J. Crucini & Anthony Landry, 2012. "Accounting for real exchange rates using micro-data," Globalization and Monetary Policy Institute Working Paper 108, Federal Reserve Bank of Dallas.
  13. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584.
  14. Mario J. Crucini & Christopher I. Telmer, 2012. "Microeconomic Sources of Real Exchange Rate Variability," NBER Working Papers 17978, National Bureau of Economic Research, Inc.
  15. George Alessandria, 2004. "International Deviations From The Law Of One Price: The Role Of Search Frictions And Market Share," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(4), pages 1263-1291, November.
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