The role of two frictions in geographic price dispersion: when market friction meets nominal rigidity

Chi-Young Choi and Horag Choi

No 219, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

Abstract: This paper empirically investigates and theoretically derives the implications of two frictions, market friction and nominal rigidity, on the dynamic properties of intra-national relative prices, with an emphasis on the interaction of the two frictions. By analyzing a panel of retail prices of 45 products for 48 cities in the U.S., we make two major arguments. First, the effect of each type of friction on the dynamics of intercity price gaps is quite different. While market frictions arising from physical distance and transportation costs contribute significantly to volatile and persistent movements of intercity price disparities, nominal rigidity is associated with higher persistence, but not with a greater volatility of the intercity price disparity. This empirical evidence is different from what is predicted by standard theoretical models based on price stickiness. Second, the strength of the marginal effect of a market friction hinges on the extent of nominal rigidity, in a counteracting manner. The marginal effect of a market friction dwindles as the extent of price stickiness increases. We provide an alternative theoretical explanation for this finding by extending the state- dependent pricing(SDP)model of Dotsey et al.(1999) and show that our two-city model with nominal rigidity andd market frictions can successfully explain the salient features of the dynamic behavior of intercity price differences.

JEL-codes: E31 F15 L16 R12 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2014-12-01
New Economics Papers: this item is included in nep-mac, nep-opm and nep-ure
Note: Published as: Choi, Chi-Young and Horag Choi (2016), "The Role of Two Frictions in Geographic Price Dispersion: When Market Friction Meets Nominal Rigidity," Journal of International Money and Finance 63: 1-27.
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.dallasfed.org/-/media/documents/resear ... papers/2014/0219.pdf Full text (application/pdf)

Related works:
Journal Article: The role of two frictions in geographic price dispersion: When market friction meets nominal rigidity (2016)
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:fip:feddgw:219

DOI: 10.24149/gwp219

Access Statistics for this paper

More papers in Globalization Institute Working Papers from Federal Reserve Bank of Dallas Contact information at EDIRC.
Bibliographic data for series maintained by Amy Chapman (amy.chapman@dal.frb.org).