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The impact of climate on the law of one price: A test using North American food prices from the 1920s
Author(s) -
Cater Bruce,
Lew Byron
Publication year - 2018
Publication title -
canadian journal of economics/revue canadienne d'économique
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.773
H-Index - 69
eISSN - 1540-5982
pISSN - 0008-4085
DOI - 10.1111/caje.12357
Subject(s) - counterfactual thinking , economics , law of one price , climate change , econometrics , elasticity (physics) , price elasticity of demand , macroeconomics , microeconomics , price level , ecology , philosophy , thermodynamics , biology , physics , mid price , epistemology
Using grocery price data for over 100 urban locations across the US and Canada from the 1920s, we show that deviations from the law of one price (LOP) were strongly related to climate differences. The effect of climate has a large impact on the elasticity of deviations from LOP with respect to distance, while having no impact on the border effect. We then test a counterfactual to show that the relationship between deviations from LOP and temperature does not hold when historical temperature data are replaced with contemporary. This is evidence that climate impacts production.