Sticky Prices, a Volatile Exchange Rate and the Border

This paper introduces a method that leads to more accurate estimates of the proportion of the border effect attributable to the nominal price/nominal exchange rate relationship. Employing this method on data from “How Wide is the Border?” (1996), this paper finds that the proportion of the border effect directly attributable to a volatile exchange rate and incomplete pass-through varies from good to good. Some goods have a small proportion of their border effect caused by the nominal price/nominal exchange rate relationship (7%-8%), while other goods have a larger proportion, up to 90%.Law of One Price (LOOP), pass-through, border, sticky price, exchange rate