We use CPI data for U.S. and Canadian cities for 14 categories of consumer prices to examine the nature of the deviations from the law of one price. The distance between cities explains a significant amount of the variation in the prices of similar goods in different cities. But the variation of the price is much higher for two cities located in different countries than for two equidistant cities in the same country. We explore some of the reasons for this finding. Sticky nominal prices appear to be one explanation but probably do not explain most of the border effect.

Many companies on China's stock markets have traditionally had separate, restricted classes of shares for domestic residents and foreigners. These shares are identical other than for who can own them, but foreigners have generally paid only about one-quarter the price paid by domestic residents. We argue that the generally higher level (and volatility) of domestic share prices is consistent with the simplest asset pricing model, assuming plausible differences-about four percentage points-in expected rates of return by foreign and domestic investors. We attribute low Chinese expected returns to the limited alternative investments available in China. We then estimate how various company characteristics (including capital asset pricing model (CAPM) betas, company size, market liquidity, and other characteristics) affect the relative price paid by foreigners in a panel of companies. We find, for example, that foreigners pay a lower relative price for companies with a higher proportion owned by the state-reflecting, surprisingly, a higher absolute price paid by both foreigners and domestic residents.

Casual analysis of six high-inflation episodes indicates a strong positive relationship between movements in the relative price ratio, measured by (WPI/CPI), and the inflation rate. The authors estimate a vector autoregression model in which relative price movements are driven by several fundamental disturbances (fiscal, monetary, output, and exchange rate), identified using only long-run restrictions based on a general-equilibrium optimizing model. Analysis of the endogenous response of relative price changes to these disturbances suggests that output and monetary shocks are the most important driving forces, although fiscal and exchange rate shocks are also influential in explaining relative price movements in some countries.