A Reappraisal of the Border Effect on Relative Price Volatility

Yin-Wong Cheung and Kon Lai

International Economic Journal, 2006, vol. 20, issue 4, 495-513

Abstract: Engel & Rogers (1996) find that crossing the US-Canada border can considerably raise relative price volatility and that exchange rate fluctuations explain about one-third of the volatility increase. Using a decomposition method, this study re-evaluates the border effect. It is shown that cross-country heterogeneity in price volatility can induce a bias in measuring the border effect unless proper adjustment is made to correct it. We further examine the implication of symmetric sampling for the border effect estimation under the decomposition approach. Two conditions governing the strength of the border effect are identified. In particular, the more dissimilar the price shocks are across countries, the greater the border effect will be. Decomposition estimates also suggest that exchange rate fluctuations actually account for a large majority of the border effect.

Keywords: Relative price volatility; exchange rate volatility; national border; distance; dissimilar shocks (search for similar items in EconPapers)
Date: 2006
References: Add references at CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://www.tandfonline.com/doi/abs/10.1080/10168730601027120 (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: A Reappraisal of the Border Effect on Relative Price Volatility (2006)
Working Paper: A Reappraisal of the Border Effect on Relative Price Volatility (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:intecj:v:20:y:2006:i:4:p:495-513

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RIEJ20

DOI: 10.1080/10168730601027120

Access Statistics for this article

International Economic Journal is currently edited by Jaymin Lee Editor

More articles in International Economic Journal from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().