Breaking for the Border: The Effect of the Exchange Rate on Cross-border Shopping in Ireland

Abstract

Movements in the real exchange rate between countries sharing an international border act as a demand shock, especially for the retail, entertainment and restaurant sectors located near the border. This paper provides an empirical analysis of the effects of fluctuations in the nominal exchange rate on cross-border shopping flows from the Republic of Ireland into Northern Ireland. The dataset consists of hourly car flows at sixteen traffic counters and the daily exchange rate during 2013-17. Identification is achieved by exploiting the daily variation in the exchange rate, the spatial variation in the effect of the exchange rate and by focusing on cross-border journeys made by car at different times of the day. When the Euro appreciates by 1%, car flows on the average border crossing rise by 2% between 9am and 3pm. This is an estimated 513 cars crossing the Irish border to go shopping. This paper provides an analysis of exchange rate movements and incentives to shop across the border outside of the North American context.

Keywords: Cross-Border Shopping; Exchange Rate; Spatial Analysis

JEL Classification: F61; R12; Z30