Working Paper: NBER ID: w17815
Authors: Mario J. Crucini; Mototsugu Shintani; Takayuki Tsuruga
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 fit of the model.
Keywords: Law of One Price; Price Dynamics; Trade Costs; Micro Price Data
JEL Codes: D40; E31; F31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| distance between cities (R12) | volatility of deviations from the law of one price (LOP) (F31) |
| distance between cities (R12) | persistence of deviations from the law of one price (LOP) (F31) |
| trade costs (F19) | persistence of deviations from the law of one price (LOP) (F31) |
| interaction of imperfect information and sticky prices (D83) | model fit (C52) |