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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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References

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  1. Aubhik Khan & Julie K. Thomas, 2003. "Inventories and the business cycle: an equilibrium analysis of (S,s) policies," Staff Report 329, Federal Reserve Bank of Minneapolis.
  2. Marianne Baxter & Mario J. Crucini, 1994. "Business Cycles and the Asset Structure of Foreign Trade," NBER Working Papers 4975, National Bureau of Economic Research, Inc.
  3. George Alessandria & Horag Choi, 2007. "Do Sunk Costs of Exporting Matter for Net Export Dynamics?," The Quarterly Journal of Economics, MIT Press, vol. 122(1), pages 289-336, 02.
  4. Alan C. Stockman & Linda L. Tesar, 1991. "Tastes and technology in a two-country model of the business cycle: explaining international co-movements," Working Paper 9019, Federal Reserve Bank of Cleveland.
  5. George Alessandria & Joseph P. Kaboski & Virgiliu Midrigan, 2010. "Inventories, Lumpy Trade, and Large Devaluations," American Economic Review, American Economic Association, vol. 100(5), pages 2304-39, December.
  6. George Alessandria & Joseph P. Kaboski & Virgiliu Midrigan, 2011. "U.S. trade and inventory dynamics," Working Papers 11-6, Federal Reserve Bank of Philadelphia.
  7. Ghironi, Fabio & Melitz, Marc, 2005. "International Trade and Macroeconomic Dynamics with Heterogeneous Firms," Scholarly Articles 3228377, Harvard University Department of Economics.
  8. Jonathan Eaton & Samuel Kortum & Brent Neiman & John Romalis, 2011. "Trade and the Global Recession," NBER Working Papers 16666, National Bureau of Economic Research, Inc.
  9. V.V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1998. "Can sticky price models generate volatile and persistent real exchange rates?," Staff Report 223, Federal Reserve Bank of Minneapolis.
  10. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1991. "International real business cycles," Staff Report 146, Federal Reserve Bank of Minneapolis.
  11. 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, vol. 11(05), pages 638-664, November.
  12. 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.
  13. Raffo, Andrea, 2008. "Net exports, consumption volatility and international business cycle models," Journal of International Economics, Elsevier, vol. 75(1), pages 14-29, May.
  14. George Alessandria & Joseph Kaboski & Virgiliu Midrigan, 2012. "Trade wedges, inventories, and international business cycles," Working Papers 12-16, Federal Reserve Bank of Philadelphia.
  15. David Backus & Patrick J. Kehoe & Finn E. Kydland, 1992. "Dynamics of the Trade Balance and the Terms of Trade: The S-Curve," NBER Working Papers 4242, National Bureau of Economic Research, Inc.
  16. George Alessandria & Joseph P. Kaboski & Virgiliu Midrigan, 2010. "The great trade collapse of 2008-2009: an inventory adjustment?," Working Papers 10-18, Federal Reserve Bank of Philadelphia.
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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 12-16, Federal Reserve Bank of Philadelphia.
  2. Rudolfs Bems & Robert C. Johnson & Kei-Mu Yi, 2013. "The Great Trade Collapse," Annual Review of Economics, Annual Reviews, vol. 5(1), pages 375-400, 05.
  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.

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