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Distribution capital and the short- and long-run import demand elasticity

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  • Crucini, Mario J.
  • Davis, J. Scott

Abstract

The elasticity of substitution between home and foreign goods is one of the most important parameters in international economics. The international macro literature, which is primarily concerned with short-run business cycle fluctuations, assigns a low value to this parameter. The international trade literature, which is more concerned with long-run changes in trade flows following a change in relative prices, assigns a high value to this parameter. This paper constructs a model where this discrepancy between the short- and long-run elasticities is due to frictions in distribution. Goods need to be combined with a local non-traded input, distribution capital, which is good specific. Home and foreign goods may be close substitutes, but if distribution capital is slow to adjust then agents cannot shift their consumption in the short run following a change in relative prices, and home and foreign goods appear as poor substitutes in the short run. In the long run this distribution capital can be reallocated, and agents can shift their purchases following a change in relative prices. Thus the observed substitutability gets larger as time passes.

Suggested Citation

  • Crucini, Mario J. & Davis, J. Scott, 2016. "Distribution capital and the short- and long-run import demand elasticity," Journal of International Economics, Elsevier, vol. 100(C), pages 203-219.
  • Handle: RePEc:eee:inecon:v:100:y:2016:i:c:p:203-219
    DOI: 10.1016/j.jinteco.2016.03.010
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    2. Anderson, James E. & Yotov, Yoto V., 2020. "Short run gravity," Journal of International Economics, Elsevier, vol. 126(C).
    3. Corsetti, Giancarlo & Mavroeidi, Eleonora & Thwaites, Gregory & Wolf, Martin, 2019. "Step away from the zero lower bound: Small open economies in a world of secular stagnation," Journal of International Economics, Elsevier, vol. 116(C), pages 88-102.
    4. Yilmazkuday, Hakan, 2019. "Understanding the international elasticity puzzle," Journal of Macroeconomics, Elsevier, vol. 59(C), pages 140-153.
    5. Nikhil Patel, 2016. "International Trade Finance and the Cost Channel of Monetary Policy in Open Economies," BIS Working Papers 539, Bank for International Settlements.
    6. A. Auer, Raphael & Chaney, Thomas & Sauré, Philip, 2018. "Quality pricing-to-market," Journal of International Economics, Elsevier, vol. 110(C), pages 87-102.
    7. Hakan Yilmazkuday, 2017. "Unifying Macro Elasticities in International Economics," Globalization Institute Working Papers 299, Federal Reserve Bank of Dallas.
    8. Corsetti, Giancarlo, 2016. "Comments on “Obstfeld and Rogoff׳s international macro puzzles: a quantitative assessment” by J. Eaton, S. Kortum and B. Neiman," Journal of Economic Dynamics and Control, Elsevier, vol. 72(C), pages 24-28.
    9. Mark A. Wynne, 2012. "Five Years of Research on Globalization and Monetary Policy: What Have We Learned?," Annual Report, Globalization and Monetary Policy Institute, Federal Reserve Bank of Dallas, pages 2-17.
    10. Baumann, Ursel & Dieppe, Alistair & Dizioli, Allan Gloe, 2017. "Why should the world care? Analysis, mechanisms and spillovers of the destination based border adjusted tax," Working Paper Series 2093, European Central Bank.
    11. Dudley Cooke, 2019. "Technology Choice and the Long- and Short-Run Armington Elasticity," Globalization Institute Working Papers 373, Federal Reserve Bank of Dallas.
    12. Michael Bleaney & Mo Tian, 2014. "Exchange Rates and Trade Balance Adjustment: A Multi-Country Empirical Analysis," Open Economies Review, Springer, vol. 25(4), pages 655-675, September.

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    Keywords

    Distribution services; Import demand elasticity;

    JEL classification:

    • F1 - International Economics - - Trade
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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