IDEAS home Printed from https://ideas.repec.org/p/fip/fedgif/533.html
   My bibliography  Save this paper

Regional patterns in the law of one price: the roles of geography vs. currencies

Author

Listed:
  • Charles Engel
  • John H. Rogers

Abstract

We find evidence that the law of one price (LOOP) holds more nearly for country pairs that are within geographic regions than for country pairs that are not. These findings are established using consumer price data from 23 countries (including data from eight North American cities.) We find that failures of LOOP are closely related to nominal exchange rate variability, suggesting a link to sticky nominal prices. We also find that distance can explain failures of LOOP, suggesting the failures arise from imperfect market integration. However, these two sources do not explain all of the failures of LOOP. We speculate that integrated marketing and distribution systems within regions cause LOOP to hold more nearly intraregionally. We present a formal model of marketing and distribution to illustrate this hypothesis.

Suggested Citation

  • Charles Engel & John H. Rogers, 1996. "Regional patterns in the law of one price: the roles of geography vs. currencies," International Finance Discussion Papers 533, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:533
    as

    Download full text from publisher

    File URL: http://www.federalreserve.gov/pubs/ifdp/1996/533/default.htm
    Download Restriction: no
    File URL: http://www.federalreserve.gov/pubs/ifdp/1996/533/ifdp533.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Engel, Charles, 1993. "Real exchange rates and relative prices : An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 32(1), pages 35-50, August.
    2. Atish R. Ghosh & Holger C. Wolf, 1994. "Pricing in International Markets: Lessons From The Economist," NBER Working Papers 4806, National Bureau of Economic Research, Inc.
    3. Paul Krugman, 1986. "Pricing to Market when the Exchange Rate Changes," NBER Working Papers 1926, National Bureau of Economic Research, Inc.
    4. N. Gregory Mankiw, 1985. "Small Menu Costs and Large Business Cycles: A Macroeconomic Model of Monopoly," The Quarterly Journal of Economics, Oxford University Press, vol. 100(2), pages 529-538.
    5. Engel, Charles & Rogers, John H, 1996. "How Wide Is the Border?," American Economic Review, American Economic Association, vol. 86(5), pages 1112-1125, December.
    6. Froot, Kenneth A & Klemperer, Paul D, 1989. "Exchange Rate Pass-Through When Market Share Matters," American Economic Review, American Economic Association, vol. 79(4), pages 637-654, September.
    7. 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.
    8. Jeffrey A. Frankel, 1993. "On Exchange Rates," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061546, January.
    9. Shang-Jin Wei & David C. Parsley, 1995. "Purchasing Power Disparity During the Floating Rate Period: Exchange Rate Volatility, Trade Barriers and Other Culprits," NBER Working Papers 5032, National Bureau of Economic Research, Inc.
    10. Rogers, John H. & Jenkins, Michael, 1995. "Haircuts or hysteresis? Sources of movements in real exchange rates," Journal of International Economics, Elsevier, vol. 38(3-4), pages 339-360, May.
    11. Frankel, Jeffrey & Stein, Ernesto & Wei, Shang-jin, 1995. "Trading blocs and the Americas: The natural, the unnatural, and the super-natural," Journal of Development Economics, Elsevier, vol. 47(1), pages 61-95, June.
    12. Froot, Kenneth A. & Kim, Michael & Rogoff, Kenneth, 1995. "The Law of One Price Over 700 Years," Working Papers 95-13, C.V. Starr Center for Applied Economics, New York University.
    13. Dornbusch, Rudiger, 1987. "Exchange Rates and Prices," American Economic Review, American Economic Association, vol. 77(1), pages 93-106, March.
    14. Michael M. Knetter, 1994. "Why are Retail Prices in Japan so High?: Evidence from German Export Prices," NBER Working Papers 4894, National Bureau of Economic Research, Inc.
    15. Jong-Wha Lee & Phillip Swagel, 2000. "Trade Barriers And Trade Flows Across Countries And Industries," The Review of Economics and Statistics, MIT Press, vol. 79(3), pages 372-382, August.
    16. Sven W. Arndt & J. David Richardson, 1987. "Real-Financial Linkages Among Open Economies," NBER Working Papers 2230, National Bureau of Economic Research, Inc.
    17. Mussa, Michael, 1986. "Nominal exchange rate regimes and the behavior of real exchange rates: Evidence and implications," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 117-214, January.
    18. Isard, Peter, 1977. "How Far Can We Push the "Law of One Price"?," American Economic Review, American Economic Association, vol. 67(5), pages 942-948, December.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Money ; Prices;

    JEL classification:

    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • F1 - International Economics - - Trade

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedgif:533. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Franz Osorio). General contact details of provider: http://edirc.repec.org/data/frbgvus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.