Noisy Information, Distance and Law of One Price Dynamics Across US Cities / Mario J. Crucini, Mototsugu Shintani, Takayuki Tsuruga.

Format:

Book

Author/Creator:

Crucini, Mario J.

Contributor:

National Bureau of Economic Research.

Shintani, Mototsugu.

Tsuruga, Takayuki.

Series:

Working Paper Series (National Bureau of Economic Research) no. w17815.

NBER working paper series no. w17815

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2012.

Summary:

Using micro price data across US cities, we provide evidence that both the volatility and persistence of deviations from the law of one price (LOP) are positively correlated with the distance between cities. A standard, two-city, equilibrium model with time-varying technology under homogeneous information can predict the relationship between the volatility and distance but not between the persistence and distance. To account for the latter fact, we augment the standard model with noisy signals about the state of nominal aggregate demand that are asymmetric across cities. We further establish that the interaction of imperfect information and sticky prices improves the fit of the model.

Notes:

Print version record

February 2012.