Violating the Law of One Price: Should We Make a Federal Case Out of it?

24 Pages Posted: 18 Apr 2011

See all articles by Charles M. Engel

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

Date Written: July 1999

Abstract

We use new disaggregated data on consumer prices to determine why there is variability in prices of similar goods across U.S. cities. We address questions similar to those that have arisen in the international context: is this variability purely a result of market segmentation or do sticky nominal prices play a role? We also examine how the degree of tradability of a good influences price variability. Surprisingly, we find that variability is larger for traded-goods. We attribute this finding to greater price stickiness for non-traded goods. Distance between cities accounts for a significant amount of the variation in prices between pairs of cities. But we also find that nominal price stickiness plays an even more significant role.

Suggested Citation

Engel, Charles M. and Rogers, John H., Violating the Law of One Price: Should We Make a Federal Case Out of it? (July 1999). NBER Working Paper No. w7242. Available at SSRN: https://ssrn.com/abstract=1812537

Charles M. Engel (Contact Author)

University of Wisconsin - Madison - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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University of Washington - Department of Economics ( email )

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John H. Rogers

Board of Governors of the Federal Reserve System - Trade and Financial Studies Section ( email )

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Washington, DC 20551
United States
202-452-2873 (Phone)
202-736-5638 (Fax)

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