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Estimating the Border Effect: Some New Evidence

  • Gita Gopinath
  • Pierre-Olivier Gourinchas
  • Chang-Tai Hsieh
  • Nicholas Li

To what extent do national borders and national currencies impose costs that segment markets across countries? To answer this question we use a dataset with product level retail prices and wholesale costs for a large grocery chain with stores in the U.S. and Canada. We develop a model of pricing by location and employ a regression discontinuity approach to estimate and interpret the border effect. We report three main facts: 1) The median absolute retail price and whole-sale cost discontinuity between adjacent stores on either side of the U.S.-Canada border is as high as 21%. In contrast, within-country border discontinuity is close to 0%; 2) The variation in the retail price gap at the border is almost entirely driven by variation in wholesale costs, not by variation in markups; 3) The border gap in prices and costs co-move almost one to one with changes in the U.S.-Canada nominal exchange rate. We show these facts suggest that the price gaps we estimate provide only a lower bound on border costs.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14938.

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Date of creation: Apr 2009
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Publication status: published as International Prices, Cost and Markup Differences (American Economic Review, 101(6), pp.2450-86, October 2011), available from American Economic Association
Handle: RePEc:nbr:nberwo:14938
Note: EFG IFM ME
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  13. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
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