TY  - JOUR
AU  - Parsley,David C.
AU  - Wei,Shang-Jin
TI  - Explaining the Border Effect: The Role of Exchange Rate Variability, Shipping Costs, and Geography
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7836
PY  - 2000
Y2  - August 2000
UR  - http://www.nber.org/papers/w7836
L1  - http://www.nber.org/papers/w7836.pdf
N1  - Author contact info:
david parsley
Owen Graduate School
Vanderbilt University
Nashville, TN  37203
Tel: 615.322.0649
Fax: 615.343.7177
E-Mail: david.parsley@vanderbilt.edu

Shang-Jin Wei
Graduate School of Business
Columbia University
Uris Hall 619
3022 Broadway
New York, NY 10027-6902
Tel: 212/854-9139
E-Mail: shangjin.wei@columbia.edu
AB  - 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.
ER  -