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Title:A reappraisal of the border effect on relative price volatility PDF Logo
Authors:Cheung, Yin-Wong
Lai, Kon-Sun
Issue Date:2006
Series/Report no.:CESifo working papers 1640
Abstract:Engel and Rogers (1996) find that crossing the US-Canada border can considerably raise relative price volatility and that exchange rate fluctuations explain about one-third of the volatility increase. In re-evaluating the border effect, this study shows that cross-country heterogeneity in price volatility can lead to significant bias in measuring the border effect unless proper adjustment is made to correct it. The analysis explores the implication of symmetric sampling for border effect estimation. Moreover, using a direct decomposition method, two conditions governing the strength of the border effect are identified. In particular, the more dissimilar the price shocks are across countries, the greater the border effect will be. Decomposition estimates also suggest that exchange rate fluctuations actually account for a large majority of the border effect.
Subjects:price volatility
exchange rate volatility
national border
distance
dissimilar shocks
JEL:F31
F41
Document Type:Working Paper
Appears in Collections:CESifo Working Papers, CESifo Group Munich

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