NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Noisy Information, Distance and Law of One Price Dynamics Across US Cities

Mario J. Crucini, Mototsugu Shintani, Takayuki Tsuruga

NBER Working Paper No. 17815
Issued in February 2012
NBER Program(s):   IFM

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.

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Document Object Identifier (DOI): 10.3386/w17815

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