A Re-Examination of the Border Effect

41 Pages Posted: 13 Jan 2006 Last revised: 28 Jun 2010

See all articles by Yuriy Gorodnichenko

Yuriy Gorodnichenko

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Linda L. Tesar

University of Michigan at Ann Arbor - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: October 2005

Abstract

This paper reexamines the evidence on the border effect, the finding that the border drives a wedge between domestic and foreign prices. We argue that the border effect can be inflated by the volatility and persistence of the nominal exchange rate and by the cross-country heterogeneity in the distribution of within-country price differentials. We develop a simple framework to separate the border effect from these confounding factors. Using price data from Engel and Rogers (1996) and Parsley and Wei (2001), we show that after controlling for the confounding factors the border effect between the U.S. and Canada and the U.S. and Japan is negligible.

Suggested Citation

Gorodnichenko, Yuriy and Tesar, Linda L., A Re-Examination of the Border Effect (October 2005). NBER Working Paper No. w11706. Available at SSRN: https://ssrn.com/abstract=837150

Yuriy Gorodnichenko (Contact Author)

University of California, Berkeley - Department of Economics ( email )

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Linda L. Tesar

University of Michigan at Ann Arbor - Department of Economics ( email )

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734-764-2769 (Fax)

National Bureau of Economic Research (NBER)

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United States

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