Border Effects within the NAFTA Countries

38 Pages Posted: 11 Apr 2001

See all articles by John H. Rogers

John H. Rogers

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

Hayden P. Smith

affiliation not provided to SSRN

Date Written: March 2001

Abstract

Using consumer price indexes from cities in the U.S., Canada and Mexico, we estimate the "border effect" on U.S.-Mexican relative prices and find that it is nearly an order of magnitude larger than for U.S.-Canadian prices. However, during a very stable sub-period in Mexico (May 1988 to November 1994), the "width" of the U.S.-Mexican border falls dramatically and becomes approximately equal to the U.S.-Canadian border. We then show that when consideration is limited to cities lying geographically very close to the U.S.-Mexican border - San Diego, Los Angeles, Houston, Dallas, Tijuana, Mexicali, Juarez, and Matamoros - the border width falls compared to that estimated with the full sample of U.S. and Mexican cities, but falls only very slightly. We also present evidence that the border effect in U.S.-Mexican prices is not primarily due to the border effect in U.S.-Mexican wages. Finally, using the prices of 276 highly disaggregated goods and services, we estimate the variability of relative prices of different items within Mexican cities. This measure of relative price variability declines during the stable peso sub-period, but by less than the decline in nominal and real (i.e., CPI-based) exchange rate variability. Our results are strong evidence of a "nominal border effect" in relative prices within NAFTA, but also indicate that real side influences are important.

Keywords: relative prices, exchange rates, purchasing power parity

JEL Classification: F3, F4

Suggested Citation

Rogers, John H. and Smith, Hayden P., Border Effects within the NAFTA Countries (March 2001). FRB International Finance Discussion Paper No. 698. Available at SSRN: https://ssrn.com/abstract=266501 or http://dx.doi.org/10.2139/ssrn.266501

John H. Rogers (Contact Author)

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

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-2873 (Phone)
202-736-5638 (Fax)

Hayden P. Smith

affiliation not provided to SSRN

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