Border Region Evidence on PPP Deviations
This article examines prices for 32 identical menu items sold by restaurant franchises operating on both sides of the border between El Paso in the US and Ciudad Juárez in Mexico from July 1997 to June 2008. The relationship between Real Exchange Rate (RER) volatility and the degree of price convergence is examined within a panel data context. The city-pair and goods selected provide a unique experiment in which distance, tradability and industry considerations are set aside and the extent of RER volatility is the only factor to influence price convergence. We find nonmonotonic relationships between mean reversion and RER volatility: very fast adjustments for both low and high volatility panels of goods (between 1 and 2 months) and slower half-lives (between 3 and 4 months) at moderate levels of uncertainty. These figures are, however, substantially smaller than the 6 or 7 months reported in previous research for general US–Mexico goods, suggesting the very strong price convergence observed along the US–Mexican border.