Noisy information, distance and law of one price dynamics across US cities

Mario Crucini (), Mototsugu Shintani and Takayuki Tsuruga

No 216, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

Abstract: Using US micro price data at the city level, we provide evidence that both the volatility and the persistence of deviations from the law of one price (LOP) are rising in the distance between US cities. A standard, two-city, stochastic equilibrium model with trade costs can predict the relationship between volatility and distance but not between 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 show that the main predictions of the model continue to hold even if we allow for the interaction of imperfect information, sticky prices, and multiple cities.

JEL-codes: D40 E31 F31 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2014-11-01
New Economics Papers: this item is included in nep-mac, nep-opm and nep-ure
Note: Published as: Crucini, Mario E., Motosugu Shintani and Takayuki Tsuruga (2015), "Noisy Information, Distance and Law of One Price Dynamics Across US Cities," Journal of Monetary Economics 74: 52-66.
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Citations: View citations in EconPapers (8)

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Related works:
Journal Article: Noisy information, distance and law of one price dynamics across US cities (2015)
Working Paper: Noisy information, distance and law of one price dynamics across US cities (2014)
Working Paper: Noisy Information, Distance and Law of One Price Dynamics Across US Cities (2012)
Working Paper: Noisy Information, Distance and Law of One Price Dynamics Across US Cities (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:feddgw:216

DOI: 10.24149/gwp216

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