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Trade wedges, inventories, and international business cycles

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  • George Alessandria
  • Joseph Kaboski
  • Virgiliu Midrigan

Abstract

The large, persistent fluctuations in international trade that cannot be explained in standard models by changes in expenditures and relative prices are often attributed to trade wedges. We show that these trade wedges can reflect the decisions of importers to change their inventory holdings. We find that a two-country model of international business cycles with an inventory management decision can generate trade flows and wedges consistent with the data. Moreover, matching trade flows alters the international transmission of business cycles. Specifically, real net exports become countercyclical and consumption is less correlated across countries than in standard models. We also show that ignoring inventories as a source of trade wedges substantially overstates the role of trade wedges in business cycle fluctuations.

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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 12-16.

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Date of creation: 2012
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Handle: RePEc:fip:fedpwp:12-16

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Keywords: Exports ; Trade;

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  1. Fabio Ghironi & Marc Melitz, 2004. "International Trade and Macroeconomic Dynamics with Heterogeneous Firms," 2004 Meeting Papers, Society for Economic Dynamics 451, Society for Economic Dynamics.
  2. Sam Kortum & John Romalis & Brent Neiman & Jonathan Eaton, 2010. "Trade and the Global Recession," 2010 Meeting Papers, Society for Economic Dynamics 1340, Society for Economic Dynamics.
  3. Baxter, Marianne & Crucini, Mario J, 1995. "Business Cycles and the Asset Structure of Foreign Trade," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(4), pages 821-54, November.
  4. Aubhik Khan & Julia K. Thomas, 2004. "Inventories and the business cycle: an equilibrium analysis of (S,s) policies," Working Papers, Federal Reserve Bank of Philadelphia 04-11, Federal Reserve Bank of Philadelphia.
  5. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1992. "Dynamics of the trade balance and the terms of trade: the S-curve," Working Paper, Federal Reserve Bank of Cleveland 9211, Federal Reserve Bank of Cleveland.
  6. Chari, V V & Kehoe, Patrick J & McGrattan, Ellen R, 2002. "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 69(3), pages 533-63, July.
  7. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1992. "International Real Business Cycles," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 100(4), pages 745-75, August.
  8. George Alessandria & Joseph P. Kaboski & Virgiliu Midrigan, 2011. "US Trade and Inventory Dynamics," American Economic Review, American Economic Association, American Economic Association, vol. 101(3), pages 303-07, May.
  9. George Alessandria & Joseph P. Kaboski & Virgiliu Midrigan, 2010. "The great trade collapse of 2008-2009: an inventory adjustment?," Working Papers, Federal Reserve Bank of Philadelphia 10-18, Federal Reserve Bank of Philadelphia.
  10. George Alessandria & Joseph Kaboski & Virgiliu Midrigan, 2012. "Trade wedges, inventories, and international business cycles," Working Papers, Federal Reserve Bank of Philadelphia 12-16, Federal Reserve Bank of Philadelphia.
  11. Charles Engel & Jian Wang, 2008. "International Trade in Durable Goods: Understanding Volatility, Cyclicality, and Elasticities," NBER Working Papers 13814, National Bureau of Economic Research, Inc.
  12. Alan C. Stockman & Linda L. Tesar, 1990. "Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements," NBER Working Papers 3566, National Bureau of Economic Research, Inc.
  13. Khan, Aubhik & Thomas, Julia K., 2007. "EXPLAINING INVENTORIES: A BUSINESS CYCLE ASSESSMENT OF THE STOCKOUT AVOIDANCE AND (S,s) MOTIVES," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 11(05), pages 638-664, November.
  14. George Alessandria & Joseph P. Kaboski & Virgiliu Midrigan, 2010. "Inventories, Lumpy Trade, and Large Devaluations," American Economic Review, American Economic Association, American Economic Association, vol. 100(5), pages 2304-39, December.
  15. George Alessandria & Horag Choi, 2005. "Do sunk costs of exporting matter for net export dynamics?," Working Papers, Federal Reserve Bank of Philadelphia 05-20, Federal Reserve Bank of Philadelphia.
  16. Raffo, Andrea, 2008. "Net exports, consumption volatility and international business cycle models," Journal of International Economics, Elsevier, Elsevier, vol. 75(1), pages 14-29, May.
  17. Kollintzas, Tryphon E. & Husted, Steven L., 1984. "Distributed lags and intermediate good imports," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 8(3), pages 303-327, December.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Trade Wedges, Inventories, and International Business Cycles
    by Christian Zimmermann in NEP-DGE blog on 2012-07-10 14:10:47
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Cited by:
  1. George Alessandria & Joseph Kaboski & Virgiliu Midrigan, 2012. "Trade wedges, inventories, and international business cycles," Working Papers, Federal Reserve Bank of Philadelphia 12-16, Federal Reserve Bank of Philadelphia.
  2. Rudolfs Bems & Robert C. Johnson & Kei-Mu Yi, 2012. "The Great Trade Collapse," NBER Working Papers 18632, National Bureau of Economic Research, Inc.
  3. Alberto Cavallo & Brent Neiman & Roberto Rigobon, 2012. "Currency Unions, Product Introductions, and the Real Exchange Rate," NBER Working Papers 18563, National Bureau of Economic Research, Inc.
  4. Iossifov, Plamen, 2014. "Cross-border production chains and business cycle co-movement between Central and Eastern European countries and euro area member states," Working Paper Series, European Central Bank 1628, European Central Bank.

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