Working Paper: NBER ID: w11706
Authors: Yuriy Gorodnichenko; Linda Tesar
Abstract: This paper reexamines the evidence on the border effect, the finding that the border drives a wedge between domestic and foreign prices. We argue that the border effect can be inflated by the volatility and persistence of the nominal exchange rate and by the cross-country heterogeneity in the distribution of within-country price differentials. We develop a simple framework to separate the border effect from these confounding factors. Using price data from Engel and Rogers (1996) and Parsley and Wei (2001), we show that after controlling for the confounding factors the border effect between the U.S. and Canada and the U.S. and Japan is negligible.
Keywords: border effect; nominal exchange rate; price differentials; international trade
JEL Codes: F3; F40; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| border effect (F55) | price differentials (L11) |
| nominal exchange rate volatility (F31) | border effect (F55) |
| country heterogeneity (C21) | border effect (F55) |
| persistence of price differentials (F12) | border effect (F55) |
| border effect (after controlling for confounders) (F55) | border effect (US and Canada) (F55) |
| border effect (after controlling for confounders) (F55) | border effect (US and Japan) (F55) |