The 'Border Effect' Between the United States and Canada: The Role of Nominal Exchange Rate Variability in the Creation of Price Level Volatility

This paper analyzes Consumer Price Indexes for the United States and Canada from 1998-2012 to study the effect of a national border in creating price dispersion. I show that the standard deviation of price levels internationally is significantly larger than intra-national deviations, suggesting a strong ‘Border Effect’. I then proceed to illustrate that a national border in fact has a much greater significance than distance, contrary to previous literature. I continue to investigate the rationale for the ‘Border Effect’ including nominal exchange rate variability and a swap of currency strengths. Both explanations demonstrate significant effect on price variability, but their importance does not appear to be a central aspect of the ‘Border Effect’.