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Federal Reserve Bank of Minneapolis
Staff Report
Equilibrium Price Dispersion and the Border Effect
Luminita Stevens
Ryan Chahrour
Abstract

We develop a model of equilibrium price dispersion via retailer search and show that the degree of market segmentation within and across countries cannot be separately identified by good-level price data alone. We augment a set of well-known empirical facts about the failure of the law of one price with data on aggregate intranational and international trade quantities, and calibrate the model to match price and quantity facts simultaneously. The calibrated model matches the data very well and implies that within-country markets are strongly segmented, while international borders contribute virtually no additional market segmentation.


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Luminita Stevens & Ryan Chahrour, Equilibrium Price Dispersion and the Border Effect, Federal Reserve Bank of Minneapolis, Staff Report 522, 18 Dec 2015.
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Keywords: Law of one price; Border effect; Real exchange rate
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