NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

How Wide is the Border?

Charles Engel, John H. Rogers

NBER Working Paper No. 4829
Issued in August 1994
NBER Program(s):   IFM

Failures of the law of one price explain much of the variation in real C.P.I. exchange rates. We use C.P.I. data for U.S. cities and Canadian cities for 14 categories of consumer prices to examine the nature of the deviations from the law of one price. The distance between cities explains a significant amount of the variation in the prices of similar goods in different cities. But, the variation of the price is much higher for two cities located in different countries than for two equidistant cities in the same country. By our most conservative measure, crossing the border adds as much to the volatility of prices as adding 2500 miles between cities.

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Document Object Identifier (DOI): 10.3386/w4829

Published: American Economic Review, Vol. 86, (December 1996), pp.1112-1125

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