The impact of international trade shocks on domestic output, income distribution, and inflation in an agent-based model

We analyze the dynamics of the domestic output, income distribution, and inflation of a small open economy subject to temporary international trade shocks. The analysis is carried out in an open economy agent-based model that extends the model in Rolim et al. (J Evol Econ 33(2):473–516, 2023). The extended version incorporates new and unexplored dimensions of the social conflict over the income distribution related to the foreign sector. Two types of international trade shocks are investigated (individually and combined): A shock to the foreign output growth rate (a demand shock) and a shock to the foreign inflation rate (a price shock). While both types of positive shocks increase exports and stimulate the domestic output, they have opposite effects on income distribution: A higher wage share and lower income Gini index follows a positive foreign demand shock, and the opposite occurs in the case of a positive foreign price shock. The shocks also create inflationary pressures that present different natures. These specific effects are due to the different transmission channels of each shock and their specific impact on the bargaining position of the agents and on the real exchange rate. When the shocks are combined, the inflationary effects are reinforced, while distributive outcomes are attenuated, but come closer to the demand shock scenario after the occurrence of the shocks. Our results also point to income distribution being an important mechanism through which international trade shocks influence the domestic economy.