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The Great Trade Collapse of 2008-09: An Inventory Adjustment?

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  • George Alessandria
  • Joseph P. Kaboski
  • Virgiliu Midrigan

Abstract

This paper examines the role of inventories in the decline of production, trade, and expenditures in the US in the economic crisis of late 2008 and 2009. Empirically, we show that international trade declined more drastically than trade-weighted production or absorption and there was a sizeable inventory adjustment. This is most clearly evident for autos, the industry with the largest drop in trade. However, relative to the magnitude of the US downturn, these movements in trade are quite typical. We develop a two-country general equilibrium model with endogenous inventory holdings in response to frictions in domestic and foreign transactions costs. With more severe frictions on international transactions, in a downturn, the calibrated model shows a larger decline in output and an even larger decline in international trade, relative to a more standard model without inventories. The magnitudes of production, trade, and inventory responses are quantitatively similar to those observed in the current and previous US recessions.

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File URL: http://www.nber.org/papers/w16059.pdf
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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16059.

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Date of creation: Jun 2010
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Publication status: published as “The Great Trade Collapse of 2008-09: An Inventory Adjustment?” with George Alessandria and Virgiliu Midrigan, IMF Economic Review, 58 (September 2010): 254-294
Handle: RePEc:nbr:nberwo:16059

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  1. 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.
  2. Francisco J. Buera & Joseph Kaboski & Yongseok Shin, 2009. "Finance and Development: A Tale of Two Sectors," NBER Working Papers 14914, National Bureau of Economic Research, Inc.
  3. George Alessandria & Joe Kaboski & Virgiliu Midrigan, 2007. "Lumpy Trade and Large Devaluations," Working Papers CAS_RN_2007_4, Laboratory for Macroeconomic Analysis.
  4. Christiano, Lawrence J., 1988. "Why does inventory investment fluctuate so much?," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 247-280.
  5. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1994. "Dynamics of the Trade Balance and the Terms of Trade: The J-Curve?," American Economic Review, American Economic Association, vol. 84(1), pages 84-103, March.
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