Explaining the Border Effect: The Role of Exchange Rate Variability, Shipping Costs, and Geography

31 Pages Posted: 12 Aug 2000 Last revised: 25 Nov 2012

See all articles by David C. Parsley

David C. Parsley

Vanderbilt University – Finance and Economics

Shang-Jin Wei

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); International Monetary Fund (IMF); Tsinghua University - School of Economics & Management

Date Written: August 2000

Abstract

This paper exploits a three-dimensional panel data set of prices on 27 traded goods, over 88 quarters, across 96 cities in the U.S. and Japan. We show that a simple average of good-level real exchange rates tracks the nominal exchange rate well, suggesting strong evidence of sticky prices. Focusing on dispersion in prices between city-pairs, we find that crossing the U.S.-Japan Border' is equivalent to adding as much as 43,000 trillion miles to the cross-country volatility of relative prices. We turn next to economic explanations for this so-called border effect and to its dynamics. Distance, unit-shipping costs, and exchange rate variability, collectively, explain a substantial portion of the observed international market segmentation. Relative wage variability, on the other hand, has little independent impact on segmentation.

Suggested Citation

Parsley, David C. and Wei, Shang-Jin, Explaining the Border Effect: The Role of Exchange Rate Variability, Shipping Costs, and Geography (August 2000). NBER Working Paper No. w7836. Available at SSRN: https://ssrn.com/abstract=238482

David C. Parsley (Contact Author)

Vanderbilt University – Finance and Economics ( email )

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HOME PAGE: http://https://business.vanderbilt.edu/bio/david-parsley/

Shang-Jin Wei

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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United Kingdom

International Monetary Fund (IMF)

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Washington, DC 20431
United States

Tsinghua University - School of Economics & Management

Beijing, 100084
China

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