The bullwhip effect and the Great Trade Collapse
AbstractThis paper demonstrates the bullwhip effect in a simple framework and tests its predictions using US industry level import data. I show that after final goods suffer a demand shock, upstream suppliers face a greater volatility of sales than their downstream counterparts and might even lose sales temporarily. The effect of the shock is magnified when the inventory-to-sales ratio of the industry is high. The impact can turn non-monotonic, that is, the volatility of a downstream production stage might exceed the volatility of its suppliers, if the upstream producers operate in networks of chains with uncorrelated demands. I show empirically that, in line with the bullwhip effect, the volatility of US imports after the Lehman shock is higher for upstream industries. In addition, upstream products are more likely to drop out of trading completely. Most of the dropouts, however, are temporary and about 90 per cent of products return to trading within two years after the shock. Those imports that do not return are more likely to have been traded for a shorter period and in smaller quantities pre-crisis.
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Bibliographic InfoPaper provided by European Bank for Reconstruction and Development, Office of the Chief Economist in its series Working Papers with number 148.
Length: 47 pages
Date of creation: Sep 2012
Date of revision:
Publication status: Published in Working papers 148, European Bank for Reconstruction and Development
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More information through EDIRC
trade collapse; supply chains; bullwhip effect;
Find related papers by JEL classification:
- F15 - International Economics - - Trade - - - Economic Integration
- F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
- L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-10-27 (All new papers)
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