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

David C. Parsley, Shang-Jin Wei

NBER Working Paper No. 7836
Issued in August 2000
NBER Program(s):International Trade and Investment

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.

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Document Object Identifier (DOI): 10.3386/w7836

Published: 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. citation courtesy of

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