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Adjustment costs and international trade dynamics

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  • Joseph E. Gagnon

Abstract

This paper develops a model of trader behavior that is characterized by quadra is adjustment costs, imperfect competition, and rational expectations. The model is fitted to data on aggregate trade flows between the United States and three of its largest trading partners. Tests against alternative specifications confirm the importance of imperfect competition and adjustment costs. The hypothesis of rational expectations cannot be rejected. The estimated price elasticities of trade flows are generally in the range reported by previous researchers, but the activity elasticities are significantly higher.

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File URL: http://www.federalreserve.gov/pubs/ifdp/1988/321/default.htm
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File URL: http://www.federalreserve.gov/pubs/ifdp/1988/321/ifdp321.pdf
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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 321.

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Date of creation: 1988
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Handle: RePEc:fip:fedgif:321

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Related research

Keywords: International trade;

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  1. Tryphon E. Kollintzas & Steven L Husted, 1983. "Distributed Lags and Intermediate Good Imports," Discussion Papers 552, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Irving B. Kravis & Robert E. Lipsey, 1980. "Price Behavior in the Light of Balance of Payments Theories," NBER Working Papers 0181, National Bureau of Economic Research, Inc.
  3. Thomas J. Sargent, 1978. "Estimation of dynamic labor demand schedules under rational expectations," Staff Report 27, Federal Reserve Bank of Minneapolis.
  4. Hansen, Lars Peter & Sargent, Thomas J., 1980. "Formulating and estimating dynamic linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 2(1), pages 7-46, May.
  5. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  6. Edison, Hali J. & Marquez, Jaime R. & Tryon, Ralph W., 1987. "The structure and properties of the Federal Reserve Board Multicountry Model," Economic Modelling, Elsevier, vol. 4(2), pages 115-315, April.
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