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Lumpy Trade and Large Devaluations

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Author Info
George Alessandria (Federal Reserve Bank of Minneapolis)
Joe Kaboski (Federal Reserve Bank of Minneapolis)
Virgiliu Midrigan (Federal Reserve Bank of Minneapolis)

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Abstract

We document that trade flows, at the micro-economic level, are lumpy an infrequent; inventory management problems faced by importers are more severe than those faced by firms that purchase material inputs domestically; and that a non-trivial component of international trade costs is independent of a shipment’s size. We show that a parsimoniously parameterized (S, s)- type economy successfully accounts for these features of the data. We then show that the model predicts that, in response to a large increase in the relative price of imported goods, import values and the number of distinct imported varieties drops immediately, and as result, short-run import elasticities are substantially larger than long-run elasticities. The model also predicts that importers find optimal to reduce markups in response to the increase in the wholesale price of imports and thus partly rationalizes the slow increase in tradeable goods’ prices following large devaluations. Our study of 6 current account reversals following large devaluation episodes in the last decade provide strong support for the model’s predictions.

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Paper provided by Laboratory for Macroeconomic Analysis in its series Working Papers with number CAS_RN_2007_4.

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Length: 51 pages
Date of creation: Feb 2007
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Handle: RePEc:cas:wpaper:cas_rn_2007_4

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  1. Helen B. Junz & Rudolf R. Rhomberg, 1973. "Price competitiveness in export trade among industrial countries," International Finance Discussion Papers 22, Board of Governors of the Federal Reserve System (U.S.).
  2. Ariel Burstein, Martin Eichenbaum, and Sergio Rebelo, 2005. "Large Devaluations and the Real Exchange Rate," Journal of Political Economy, University of Chicago Press, vol. 113(4), pages 742-784, August.
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  3. Roberts, Mark J & Tybout, James R, 1997. "The Decision to Export in Colombia: An Empirical Model of Entry with Sunk Costs," American Economic Review, American Economic Association, vol. 87(4), pages 545-64, September. [Downloadable!] (restricted)
  4. Ricardo J. Caballero & Eduardo M.R.A. Engel, 1991. "Dynamic (S,s) Economies," NBER Working Papers 3734, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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    • Caballero, Ricardo J & Engel, Eduardo M R A, 1991. "Dynamic (S, s) Economies," Econometrica, Econometric Society, vol. 59(6), pages 1659-86, November. [Downloadable!] (restricted)
  5. Aubhik Khan & Julia K. Thomas, 2002. "Inventories and the business cycle: an equilibrium analysis of (S,s) policies," Working Papers 02-20, Federal Reserve Bank of Philadelphia. [Downloadable!]
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  6. Ellen E. Meade, 1988. "Exchange rates, adjustment, and the J-curve," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Oct, pages 633-644.
  7. Neumeyer, Pablo A. & Perri, Fabrizio, 2005. "Business cycles in emerging economies: the role of interest rates," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 345-380, March. [Downloadable!] (restricted)
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  8. Mark Aguiar & Gita Gopinath, 2007. "Emerging Market Business Cycles: The Cycle Is the Trend," Journal of Political Economy, University of Chicago Press, vol. 115, pages 69-102. [Downloadable!] (restricted)
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  9. Kei-Mu Yi, 2003. "Can Vertical Specialization Explain the Growth of World Trade?," Journal of Political Economy, University of Chicago Press, vol. 111(1), pages 52-102, February. [Downloadable!] (restricted)
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  10. Junz, Helen B & Rhomberg, Rudolf R, 1973. "Price Competitiveness in Export Trade Among Industrial Countries," American Economic Review, American Economic Association, vol. 63(2), pages 412-18, May. [Downloadable!] (restricted)
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