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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)

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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Bibliographic Info

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
Date of revision:
Handle: RePEc:cas:wpaper:cas_rn_2007_4

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Cited by:
  1. Virgiliu Midrigan & Joseph Kaboski & George Alessandria, 2010. "The Great Trade Collapse of 2008-09: An Inventory Adjustment?," 2010 Meeting Papers 107, Society for Economic Dynamics.
  2. Cecília Hornok & Miklós Koren, 2011. "Administrative Barriers and the Lumpiness of Trade," CEU Working Papers 2012_6, Department of Economics, Central European University, revised 01 Sep 2011.
  3. Myrto Kalouptsidi, 2011. "Time to Build and Shipping Prices," 2011 Meeting Papers 661, Society for Economic Dynamics.

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