How Wide is the Border?
Abstract
Failures of the law of one price explain much of the variation in real C.P.I. exchange rates. We use C.P.I. data for U.S. cities and Canadian cities for 14 categories of consumer prices to examine the nature of the deviations from the law of one price. The distance between cities explains a significant amount of the variation in the prices of similar goods in different cities. But, the variation of the price is much higher for two cities located in different countries than for two equidistant cities in the same country. By our most conservative measure, crossing the border adds as much to the volatility of prices as adding 2500 miles between cities.
Abstract Failures ofthe law ofone price explain much ofthe variation in real C.P.!. exchange rates. We use C.P.I. data for U.S. cities and Canadian cities for 14 categories ofconsumer prices to examine the nature ofthe deviations from the law ofone price. The distance between cities explains a significant amount ofthe variation in the prices ofsimilar goods in different cities. But, the variation ofthe price is much higher for two cities located in different countries than for two equidistant cities in the same country. By our most conservative measure, crossing the border adds as much to the volatility ofprices as adding 2500 miles between cities.
Cite this document
Charles Engel and John H. Rogers (1995). How Wide is the Border? (IFDP 1995-498). Board of Governors of the Federal Reserve System, International Finance Discussion Papers. https://whenthefedspeaks.com/doc/ifdp_1995-498
@techreport{wtfs_ifdp_1995_498,
author = {Charles Engel and John H. Rogers},
title = {How Wide is the Border?},
type = {International Finance Discussion Papers},
number = {1995-498},
institution = {Board of Governors of the Federal Reserve System},
year = {1995},
url = {https://whenthefedspeaks.com/doc/ifdp_1995-498},
abstract = {Failures of the law of one price explain much of the variation in real C.P.I. exchange rates. We use C.P.I. data for U.S. cities and Canadian cities for 14 categories of consumer prices to examine the nature of the deviations from the law of one price. The distance between cities explains a significant amount of the variation in the prices of similar goods in different cities. But, the variation of the price is much higher for two cities located in different countries than for two equidistant cities in the same country. By our most conservative measure, crossing the border adds as much to the volatility of prices as adding 2500 miles between cities.},
}