Failures of the law of one price explain much of the variation in real C.P.I. exchange rates. We use C.P.I. data for U.S. cities and Canadian cities for 14 categories of consumer prices to examine the nature of the deviations from the law of one price. The distance between cities explains a significant amount of the variation in the prices of similar goods in different cities. But, the variation of the price is much higher for two cities located in different countries than for two equidistant cities in the same country. By our most conservative measure, crossing the border adds as much to the volatility of prices as adding 2500 miles between cities.
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"August 1994."
Includes bibliographical references (p. 27-28).
Electronic access limited to Binghamton University faculty, staff and students for instructional and research purposes only.
Electronic version available via the Internet at the NBER World Wide Web site.
Financial support from the National Science Foundation, grant no. SBR-932078.
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