How Wide is the Border?
Charles M. Engel
University of Wisconsin - Madison - Department of Economics; National Bureau of Economic Research (NBER); University of Washington - Department of Economics
John H. Rogers
Board of Governors of the Federal Reserve System - Trade and Financial Studies Section
NBER Working Paper No. w4829
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.
Number of Pages in PDF File: 43working papers series
Date posted: September 6, 2000
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