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Revisiting the Border: an assessment of the law of one price using very disaggregated consumer price data

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  • Charles Engel
  • John H. Rogers
  • Shing-Yi Wang

Abstract

We reexamine the evidence for border effects in deviations from the law of one price, using data for consumer prices from Canadian and U.S. cities. The study parallels Engel and Rogers (1996), except that this study uses actual price data rather than price index data. We find evidence of border effects both in the levels of prices and the percentage change in prices. Even accounting for distance between cities and relative population sizes, we find that the absolute difference between prices in the U.S. and Canada in our data (annual from 1990 to 2002) is greater than seven percent. This difference exists among tradables and nontradables, though for some categories of tradables (clothing and durables) the difference is smaller. The findings are similar for annual changes, though the magnitude is smaller: the border accounts for a difference in 1.5 percent in annual (log) price changes. Relative population sizes and distance are helpful in explaining price level differences (between Canadian and U.S. cities) for traded goods, but are less helpful in explaining price level differences for nontraded goods or for accounting for differences in price changes for either traded or nontraded goods.

Suggested Citation

  • Charles Engel & John H. Rogers & Shing-Yi Wang, 2003. "Revisiting the Border: an assessment of the law of one price using very disaggregated consumer price data," International Finance Discussion Papers 777, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgif:777
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    References listed on IDEAS

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    1. Engel, Charles & Rogers, John H, 1996. "How Wide Is the Border?," American Economic Review, American Economic Association, vol. 86(5), pages 1112-1125, December.
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    Cited by:

    1. Robinson, Amanda Lea, 2016. "Internal Borders: Ethnic-Based Market Segmentation in Malawi," World Development, Elsevier, vol. 87(C), pages 371-384.
    2. Bergin, Paul R. & Glick, Reuven, 2007. "Global price dispersion: Are prices converging or diverging?," Journal of International Money and Finance, Elsevier, vol. 26(5), pages 703-729, September.
    3. Rodolphe Blavy & Luciana Juvenal, 2009. "Mexico's integration into NAFTA markets: a view from sectoral real exchange rates," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 441-464.
    4. Wolf, Nikolaus & Schulze, Max-Stephan, 2005. "Harbingers of dissolution? Grain prices, borders and nationalism in the Habsburg economy before the First World War," Discussion Papers 2005/20, Free University Berlin, School of Business & Economics.
    5. Kano, Kazuko & Kano, Takashi & Takechi, Kazutaka, 2013. "Exaggerated death of distance: Revisiting distance effects on regional price dispersions," Journal of International Economics, Elsevier, vol. 90(2), pages 403-413.
    6. Giri, Rahul, 2012. "Local costs of distribution, international trade costs and micro evidence on the law of one price," Journal of International Economics, Elsevier, vol. 86(1), pages 82-100.
    7. A. Nchake Mamello & Edwards Lawrence & N. Kaya Tresor, 2017. "Working Paper 272 - Price effects of borders between Lesotho and South Africa," Working Paper Series 2389, African Development Bank.
    8. Jiří Schwarz, 2012. "Impact of institutions on cross-border price dispersion," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 148(4), pages 617-645, December.
    9. Lawrence Edwards & Neil Rankin, 2016. "Is Africa integrating? Evidence from product markets," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 25(2), pages 266-289, March.
    10. Claudio E. V. Borio & Andrew Filardo, 2007. "Globalisation and inflation: New cross-country evidence on the global determinants of domestic inflation," BIS Working Papers 227, Bank for International Settlements.
    11. Nagayasu, Jun & Inakura, Noriko, 2009. "PPP: Further evidence from Japanese regional data," International Review of Economics & Finance, Elsevier, vol. 18(3), pages 419-427, June.
    12. 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.
    13. Martin Cincibuch & Jiří Podpiera, 2006. "Beyond Balassa-Samuelson: Real appreciation in tradables in transition countries," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 14(3), pages 547-573, July.
    14. Uebele, Martin, 2011. "National and international market integration in the 19th century: Evidence from comovement," Explorations in Economic History, Elsevier, vol. 48(2), pages 226-242, April.
    15. Morshed, A.K.M. Mahbub, 2011. "Border effects in the variability of rice price in the Indian subcontinent: Results from a natural experiment," Journal of Asian Economics, Elsevier, vol. 22(4), pages 295-301, August.
    16. Bruno Versailles, 2012. "Market Intergration and Border Effects in Eastern Africa," CSAE Working Paper Series 2012-01, Centre for the Study of African Economies, University of Oxford.
    17. Andrabi, Tahir & Kuehlwein, Michael, 2010. "Railways and Price Convergence in British India," The Journal of Economic History, Cambridge University Press, vol. 70(02), pages 351-377, June.
    18. Bruno Versailles, 2012. "Market Integration and Border Effects in Eastern Africa," Economics Series Working Papers WPS/2012-01, University of Oxford, Department of Economics.
    19. Choi, Chi-Young & Choi, Horag, 2014. "Does distance reflect more than transport costs?," Economics Letters, Elsevier, vol. 125(1), pages 82-86.
    20. Luciana Juvenal & Rodolphe Blavy, 2008. "Mexico’s Integration into NAFTA Markets; A View from Sectoral Real Exchange Rates and Transaction Costs," IMF Working Papers 08/123, International Monetary Fund.
    21. Gianpaolo Rossini & Paolo Zanghieri, 2008. "What Drives Price Differentials of Consumables in Europe? Size? Affluence? Or Both?," Open Economies Review, Springer, vol. 19(1), pages 121-134, February.

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    Keywords

    Prices ; Foreign exchange rates;

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