Federal Reserve Seminar: How Far Is Seattle from Vancouver?
Yuriy Gorodnichenko and Linda Tesar (2006), "Border Effect or Country Effect?: Seattle Is 110 Miles From Vancouver After All" (Ann Arbor: University of Michigan) http://www-personal.umich.edu/~ygorodni/Gorodnichenko-Tesar-Border.pdf:
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 if there is cross-country heterogeneity in the distribution of within-country price differentials, there is no clear benchmark from which to gauge the effect of a border. In the absence of a structural model it is impossible to separate the “border” effect from the effect of trading with a country with a different distribution of prices. We show that the border effect identified by Engel and Rogers (1996) is entirely driven by the difference in the distribution of prices within the US and Canada.
