Regional Patterns in the Law of One Price: The Roles of Geography vs. Currencies

45 Pages Posted: 12 Jul 2000

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: December 1995

Abstract

We find evidence that the law of one price (LOOP) holds more nearly for country pairs that are within geographic regions than for country pairs that are not. These findings are established using disaggregated consumer price data from 23 countries (including data from eight North American cities). We find that failures of LOOP are closely related to nominal exchange rate variability, suggesting a link to sticky nominal prices. We also find that distance can explain failures of LOOP, suggesting the failures arise from imperfect market integration. However, these two sources do not explain all of the failure of LOOP. We speculate that integrated marketing and distribution systems within regions cause LOOP to hold more nearly intraregionally. We present a formal model of marketing and distribution to illustrate this hypothesis.

Suggested Citation

Engel, Charles M. and Rogers, John H., Regional Patterns in the Law of One Price: The Roles of Geography vs. Currencies (December 1995). NBER Working Paper No. w5395. Available at SSRN: https://ssrn.com/abstract=225456

Charles M. Engel (Contact Author)

University of Wisconsin - Madison - 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
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202-736-5638 (Fax)

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