The Border Effect in Small Open Economies

Posted: 14 Mar 2008

See all articles by Julius Horvath

Julius Horvath

Central European University (CEU) - Department of Economics

Attila Ratfai

Central European University (CEU) - Department of Economics

Botond Döme

Corvinus University Budapest; Central European University (CEU)

Abstract

This paper examines the importance of the national border in relative price variability in two neighboring, small open economies. Using monthly frequency price data of narrowly defined, homogenous consumer products, it finds that the time-series variation in within-country relative prices is about the same in the two countries. After controlling for distance, relative price variation is significantly higher across than within countries. The border is the dominant determinant of relative prices, even after accounting for nominal exchange rate variability and local culture as represented by language spoken. Our estimates of the border effect are largely immune to the bias identified in Gorodnichenko and Tesar (2006).

Keywords: Border effect, Pricing analysis

JEL Classification: R320, F140

Suggested Citation

Horvath, Julius and Ratfai, Attila and Döme, Botond, The Border Effect in Small Open Economies. Economic Systems, Vol. 32, No. 1, 2008, Available at SSRN: https://ssrn.com/abstract=1105669

Julius Horvath (Contact Author)

Central European University (CEU) - Department of Economics ( email )

Nador u. 9.
Budapest H-1051
Hungary
36-1-327-3248 (Phone)
36-1-327-3243 (Fax)

Attila Ratfai

Central European University (CEU) - Department of Economics ( email )

Nador u. 9.
Budapest H-1051
Hungary
+36 1 327 3000 ext. 2280 (Phone)

HOME PAGE: http://www.personal.ceu.hu/departs/personal/Attila

Botond Döme

Corvinus University Budapest ( email )

Budapest H-1093
Hungary

Central European University (CEU)

Nador utca 9
Budapest, H-1051
Hungary

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