International price volatility: Evidence from U.S. and Mexican cities

We investigate price volatility across cities in the U.S. and Mexico. We find substantial differences in volatility across types of city pairs, with unexplained price volatility exhibiting heteroscedasticity. U.S. city pairs have the lowest variance in unexplained price volatility while international city pairs have the greatest. We test whether the North American Free Tree Agreement (NAFTA) had any statistical impact on intercity price volatility and find that the impact was minor. Finally, following Engel and Rogers (1996), we find the width of the Mexico-U.S. border equivalent to adding between 3,642 and 44,765 miles of distance. However, since the NAFTA was passed the border has "shrunk" by about 5%.