Explaining the Border Effect: The Role of Exchange Rate Variability, Shipping Costs, and Geography / David C. Parsley, Shang-Jin Wei.

Format:

Book

Author/Creator:

Parsley, David C.

Contributor:

National Bureau of Economic Research.

Wei, Shang-Jin.

Series:

Working Paper Series (National Bureau of Economic Research) no. w7836.

NBER working paper series no. w7836

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Explaining the Border Effect

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2000.

Summary:

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.

Notes:

Print version record

August 2000.