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Border, border, wide and far, how we wonder what you are

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Listed:
  • Parsley, David C.
  • Shang-Jin Wei

Abstract

The authors exploit three-dimensional panel data on prices for twenty seven traded goods, over eighty eight quarters, across ninety six cities in Japan, and the United States, to answer several questions: 1) Does the average exchange rate between countries stray further from zero, than that between cities within a country? 2) Is there any tendency for the average exchange rate to move closer to zero over time? 3) Does the border narrow over time? 4) Is there evidence linking changes in the so-called border effect - the extra dispersion in prices between cities in different countries, beyond what physical distance could explain - with plausible economic explanations, such as exchange rate variability? The authors present evidence that the intra-national real exchange rates are substantially less volatile than the comparable distribution of international relative prices. They also show that an equally weighted average of commodity-level real exchange rates, tracks the nominal exchange rate well, suggesting strong evidence of sticky prices. Next they turn to economic explanations for the dynamics of the border effect. Focusing on the dispersion of prices between city pairs, they confirm previous findings that crossing national borders adds significantly to price dispersion. Based on their point estimates, crossing the US-Japan border is equivalent to adding between 2.5 and 13 million miles to the cross-country volatility of relative prices. They infer that distance, exchange rates, shipping costs, and relative variability inwages, influence the border effect. After those variables are controlled for, the border effect disappears.

Suggested Citation

  • Parsley, David C. & Shang-Jin Wei, 1999. "Border, border, wide and far, how we wonder what you are," Policy Research Working Paper Series 2217, The World Bank.
  • Handle: RePEc:wbk:wbrwps:2217
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    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. Paul G. J. O'Connell & Shang-Jin Wei, 1997. ""The Bigger They Are, The Harder They Fall": How Price Differences Across U.S. Cities Are Arbitraged," NBER Working Papers 6089, National Bureau of Economic Research, Inc.
    3. Engel, Charles & Rogers, John H, 1996. "How Wide Is the Border?," American Economic Review, American Economic Association, vol. 86(5), pages 1112-1125, December.
    4. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "A panel project on purchasing power parity: Mean reversion within and between countries," Journal of International Economics, Elsevier, vol. 40(1-2), pages 209-224, February.
    5. David C. Parsley & Shang-Jin Wei, 1996. "Convergence to the Law of One Price Without Trade Barriers or Currency Fluctuations," The Quarterly Journal of Economics, Oxford University Press, vol. 111(4), pages 1211-1236.
    6. Froot, Kenneth A. & Rogoff, Kenneth, 1995. "Perspectives on PPP and long-run real exchange rates," Handbook of International Economics,in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 32, pages 1647-1688 Elsevier.
    7. Shang-Jin Wei, 1996. "Intra-National versus International Trade: How Stubborn are Nations in Global Integration?," NBER Working Papers 5531, National Bureau of Economic Research, Inc.
    8. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584-584.
    9. McCallum, John, 1995. "National Borders Matter: Canada-U.S. Regional Trade Patterns," American Economic Review, American Economic Association, vol. 85(3), pages 615-623, June.
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    Keywords

    Markets and Market Access; Economic Theory&Research; Environmental Economics&Policies; ICT Policy and Strategies; Fiscal&Monetary Policy; Macroeconomic Management; Economic Stabilization; Environmental Economics&Policies; ICT Policy and Strategies; Economic Theory&Research;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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