Explaining the Border Effect: The Role of Exchange Rate Variability, Shipping Costs, and Geography

David Parsley and Shang-Jin Wei

No 7836, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper exploits a three-dimensional panel data set of prices on 27 traded goods, over 88 quarters, across 96 cities in the U.S. and Japan. We show that a simple average of good-level real exchange rates tracks the nominal exchange rate well, suggesting strong evidence of sticky prices. Focusing on dispersion in prices between city-pairs, we find that crossing the U.S.-Japan Border' is equivalent to adding as much as 43,000 trillion miles to the cross-country volatility of relative prices. We turn next to economic explanations for this so-called border effect and to its dynamics. Distance, unit-shipping costs, and exchange rate variability, collectively, explain a substantial portion of the observed international market segmentation. Relative wage variability, on the other hand, has little independent impact on segmentation.

JEL-codes: F30 F40 (search for similar items in EconPapers)
Date: 2000-08
Note: ITI
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

Published as Parsley, David C. and Shang-Jin Wei. "Explaining The Border Effect: The Role Of Exchange Rae Variability, Shipping Costs, And Geography," Journal of International Economics, 2001, v55(1,Oct), 87-105.

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Journal Article: Explaining the border effect: the role of exchange rate variability, shipping costs, and geography (2001)
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