IDEAS home Printed from https://ideas.repec.org/a/ecj/econjl/v120y2010i544p462-480.html
   My bibliography  Save this article

The Law of One Price without the Border: The Role of Distance versus Sticky Prices

Author

Listed:
  • MarioJ. Crucini
  • Mototsugu Shintani
  • Takayuki Tsuruga

Abstract

We build a single-country, two-city, model with nominal rigidities and transport costs which predicts that variation of LOP deviations is lower for goods with infrequent price adjustment after controlling for distance. We adapt the Engel and Rogers (1996) regression to analyse Japanese retail prices at the city level and find that results are consistent with the theoretical predictions. The regression results also suggest that the distance equivalent of nominal rigidities can be as large as the 'width' of the border found in the literature on international LOP, casting doubt on casual interpretations of distance as a metric for market segmentation. Copyright © The Author(s). Journal compilation © Royal Economic Society 2010.

Suggested Citation

  • MarioJ. Crucini & Mototsugu Shintani & Takayuki Tsuruga, 2010. "The Law of One Price without the Border: The Role of Distance versus Sticky Prices," Economic Journal, Royal Economic Society, vol. 120(544), pages 462-480, May.
    • Handle: RePEc:ecj:econjl:v:120:y:2010:i:544:p:462-480
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Goldberg, Pinelopi K. & Verboven, Frank, 2005. "Market integration and convergence to the Law of One Price: evidence from the European car market," Journal of International Economics, Elsevier, vol. 65(1), pages 49-73, January.
    2. Baba, Chikako, 2007. "Price dispersion across and within countries: The case of Japan and Korea," Journal of the Japanese and International Economies, Elsevier, vol. 21(2), pages 237-259, June.
    3. Crucini, Mario J. & Shintani, Mototsugu & Tsuruga, Takayuki, 2010. "Accounting for persistence and volatility of good-level real exchange rates: The role of sticky information," Journal of International Economics, Elsevier, vol. 81(1), pages 48-60, May.
    4. Peter J. Klenow & Oleksiy Kryvtsov, 2008. "State-Dependent or Time-Dependent Pricing: Does it Matter for Recent U.S. Inflation?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(3), pages 863-904.
    5. Crucini, Mario J. & Shintani, Mototsugu, 2008. "Persistence in law of one price deviations: Evidence from micro-data," Journal of Monetary Economics, Elsevier, vol. 55(3), pages 629-644, April.
    6. Paul R. Bergin & Robert C. Feenstra, 2017. "Pricing-to-Market, Staggered Contracts, and Real Exchange Rate Persistence," World Scientific Book Chapters, in: International Macroeconomic Interdependence, chapter 6, pages 155-185, World Scientific Publishing Co. Pte. Ltd..
    7. Engel, Charles & Rogers, John H, 1996. "How Wide Is the Border?," American Economic Review, American Economic Association, vol. 86(5), pages 1112-1125, December.
    8. Christian Broda & David E. Weinstein, 2008. "Understanding International Price Differences Using Barcode Data," NBER Working Papers 14017, National Bureau of Economic Research, Inc.
    9. Mario J. Crucini & Chris I. Telmer & Marios Zachariadis, 2005. "Understanding European Real Exchange Rates," American Economic Review, American Economic Association, vol. 95(3), pages 724-738, June.
    10. Mark Bils & Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 947-985, October.
    11. Masahiro Higo & Yumi Saita, 2007. "Price Setting in Japan: Evidence from CPI Micro Data," Bank of Japan Working Paper Series 07-E-20, Bank of Japan.
    12. David C. Parsley & Shang-Jin Wei, 1996. "Convergence to the Law of One Price Without Trade Barriers or Currency Fluctuations," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 111(4), pages 1211-1236.
    13. Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(4), pages 1415-1464.
    14. Janet Ceglowski, 2003. "The law of one price: intranational evidence for Canada," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 36(2), pages 373-400, May.
    15. Yin-Wong Cheung & Eiji Fujii, 2008. "Deviations from the Law of One Price in Japan," CESifo Working Paper Series 2275, CESifo.
    16. V. V Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2002. "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 69(3), pages 533-563.
    17. Janet Ceglowski, 2003. "The law of one price: intranational evidence for Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 36(2), pages 373-400, May.
    18. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    19. Choi, Chi-Young & Matsubara, Kiyoshi, 2007. "Heterogeneity in the persistence of relative prices: What do the Japanese cities tell us?," Journal of the Japanese and International Economies, Elsevier, vol. 21(2), pages 260-286, June.
    20. Patrick J. Kehoe & Virgiliu Midrigan, 2007. "Sticky prices and sectoral real exchange rates," Working Papers 656, Federal Reserve Bank of Minneapolis.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Crucini, Mario J. & Shintani, Mototsugu & Tsuruga, Takayuki, 2015. "Noisy information, distance and law of one price dynamics across US cities," Journal of Monetary Economics, Elsevier, vol. 74(C), pages 52-66.
    2. Carlos Carvalho & Fernanda Nechio, 2011. "Aggregation and the PPP Puzzle in a Sticky-Price Model," American Economic Review, American Economic Association, vol. 101(6), pages 2391-2424, October.
    3. Burstein, Ariel & Gopinath, Gita, 2014. "International Prices and Exchange Rates," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 391-451, Elsevier.
    4. Andrade, Philippe & Zachariadis, Marios, 2016. "Global versus local shocks in micro price dynamics," Journal of International Economics, Elsevier, vol. 98(C), pages 78-92.
    5. Ross D. Hickey & David S. Jacks, 2011. "Nominal rigidities and retail price dispersion in Canada over the twentieth century," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 44(3), pages 749-780, August.
    6. Elberg, Andrés, 2016. "Sticky prices and deviations from the Law of One Price: Evidence from Mexican micro-price data," Journal of International Economics, Elsevier, vol. 98(C), pages 191-203.
    7. Crucini, Mario J. & Shintani, Mototsugu & Tsuruga, Takayuki, 2010. "Accounting for persistence and volatility of good-level real exchange rates: The role of sticky information," Journal of International Economics, Elsevier, vol. 81(1), pages 48-60, May.
    8. Mario J. Crucini & Mototsugu Shintani & Takayuki Tsuruga, 2020. "A Behavioral Explanation for the Puzzling Persistence of the Aggregate Real Exchange Rate," NBER Working Papers 27420, National Bureau of Economic Research, Inc.
    9. Christian Broda & David E. Weinstein, 2008. "Understanding International Price Differences Using Barcode Data," NBER Working Papers 14017, National Bureau of Economic Research, Inc.
    10. Crucini, Mario J. & Shintani, Mototsugu, 2008. "Persistence in law of one price deviations: Evidence from micro-data," Journal of Monetary Economics, Elsevier, vol. 55(3), pages 629-644, April.
    11. Baxter, Marianne & Landry, Anthony, 2017. "IKEA: Product, pricing, and pass-through," Research in Economics, Elsevier, vol. 71(3), pages 507-520.
    12. Candian, Giacomo, 2019. "Information frictions and real exchange rate dynamics," Journal of International Economics, Elsevier, vol. 116(C), pages 189-205.
    13. James MacGee & Chris Hajzler, 2012. "Retail Price Differences across U.S. and Canadian Cities during the Interwar Period," 2012 Meeting Papers 1126, Society for Economic Dynamics.
    14. Kano, Kazuko & Kano, Takashi & Takechi, Kazutaka, 2013. "Exaggerated death of distance: Revisiting distance effects on regional price dispersions," Journal of International Economics, Elsevier, vol. 90(2), pages 403-413.
    15. Roberto Rigobon & Brent Neiman & Alberto Cavallo, 2013. "Product Introductions, Currency Unions, and the Real Exchange Rate," 2013 Meeting Papers 1357, Society for Economic Dynamics.
    16. Fernando Borraz & Leandro Zipitría, 2016. "Law of One Price, Distance, and Borders," Documentos de trabajo 2016007, Banco Central del Uruguay.
    17. Bruce Cater & Byron Lew, 2018. "The impact of climate on the law of one price: A test using North American food prices from the 1920s," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 51(4), pages 1191-1220, November.
    18. Kitenge, Erick M. & Morshed, A.K.M. Mahbub, 2019. "Price convergence among Indian cities: The role of linguistic differences, topography, and aggregation," Journal of Asian Economics, Elsevier, vol. 61(C), pages 34-50.
    19. Herz, Benedikt & Mejer, Malwina, 2020. "The effect of design protection on price and price dispersion: Evidence from automotive spare parts," MPRA Paper 109645, University Library of Munich, Germany, revised 01 Sep 2021.
    20. Mike Nyawo & Neil Rankin, 2020. "Price adjustment after hyperinflation in Zimbabwe," African Development Review, African Development Bank, vol. 32(2), pages 240-256, June.

    More about this item

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ecj:econjl:v:120:y:2010:i:544:p:462-480. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley-Blackwell Digital Licensing or Christopher F. Baum (email available below). General contact details of provider: https://edirc.repec.org/data/resssea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.