29 Pages Posted: 15 Sep 2005 Last revised: 6 Feb 2010
Date Written: September 22, 2005
This paper reexamines the evidence on the border effect. We argue that if there is cross-country heterogeneity in the distribution of within-country price differentials, there is no clear benchmark from which to gauge the effect of a border. In the absence of a structural model or a (natural) experiment, it is impossible to separate the “border” effect from the effect of trading with a country with a different distribution of prices. We show that the border effect identified by Engel and Rogers (1996) is entirely driven by the difference in the distribution of prices within the United States and Canada.
Keywords: border effect, purchasing power parity, price adjustment
JEL Classification: F3, F40, F41
Suggested Citation: Suggested Citation
Gorodnichenko, Yuriy and Tesar, Linda L., Border Effect or Country Effect?: Seattle May Not Be so Far from Vancouver after All (September 22, 2005). Available at SSRN: https://ssrn.com/abstract=800535 or http://dx.doi.org/10.2139/ssrn.800535