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Imported inputs, irreversibility, and international trade dynamics

Listed author(s):
  • Ramanarayanan, Ananth

In aggregate data, international trade volumes adjust slowly in response to relative price changes, an observation at odds with static models. This paper develops a model of trade in intermediate inputs in which heterogeneous producers face irreversibilities in adjusting their importing status. Changes in aggregate imports are accounted for by adjustment within importing plants, through reallocation between non-importers and importers, and through changes in the importing decisions of new and existing plants. When calibrated to Chilean plant-level data, the model shows that irreversibilities are important for generating aggregate and plant-level dynamics of trade flows in line with the data. In response to a permanent trade reform, increased importing at existing plants crowds out entry, raising consumption above its long-run level, and leading to welfare gains larger than a static model would imply.

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File URL: http://www.sciencedirect.com/science/article/pii/S0022199616301209
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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 104 (2017)
Issue (Month): C ()
Pages: 1-18

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Handle: RePEc:eee:inecon:v:104:y:2017:i:c:p:1-18
DOI: 10.1016/j.jinteco.2016.10.007
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505552

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