Noisy Information, Distance and Law of One Price Dynamics Across US Cities

Mario Crucini (), Mototsugu Shintani and Takayuki Tsuruga

Discussion papers from Graduate School of Economics Project Center, Kyoto University

Abstract: Using micro price data across US cities, we provide evidence that both the volatility and persistence of deviations from the law of one price (LOP) are positively correlated with the distance between cities. A standard, two-city, equilibrium model with time- varying technology under homogeneous information can predict the relationship between the volatility and distance but not between the 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 establish that the interaction of imperfect information and sticky prices improves the fi t of the model.

Keywords: Real exchange rates; Law of one price; Relative prices; Trade cost (search for similar items in EconPapers)
JEL-codes: D40 E31 F31 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2010-10, Revised 2012-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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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 (2014)
Working Paper: Noisy Information, Distance and Law of One Price Dynamics Across US Cities (2012)
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