Regional patterns in the law of one price: the roles of geography vs. currencies

Charles Engel and John Rogers

No 533, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We find evidence that the law of one price (LOOP) holds more nearly for country pairs that are within geographic regions than for country pairs that are not. These findings are established using consumer price data from 23 countries (including data from eight North American cities.) We find that failures of LOOP are closely related to nominal exchange rate variability, suggesting a link to sticky nominal prices. We also find that distance can explain failures of LOOP, suggesting the failures arise from imperfect market integration. However, these two sources do not explain all of the failures of LOOP. We speculate that integrated marketing and distribution systems within regions cause LOOP to hold more nearly intraregionally. We present a formal model of marketing and distribution to illustrate this hypothesis.

Keywords: Money; Prices (search for similar items in EconPapers)
Date: 1996
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Citations: View citations in EconPapers (8)

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Related works:
Working Paper: Regional Patterns in the Law of One Price: The Roles of Geography vs. Currencies (1996)
Working Paper: Regional Patterns in the Law of One Price: The Roles of Geography vs. Currencies (1996)
Working Paper: Regional Patterns in the Law of One Price: The Roles of Geography vs. Currencies (1995)
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