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Goods-Market Frictions and International Trade

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Abstract

We add goods-market frictions to a general equilibrium dynamic model with heterogeneous exporting producers and identical importing retailers. Our tractable framework leads to endogenously unmatched producers, which attenuate welfare responses to foreign shocks but increase the trade elasticity relative to a model without search costs. Search frictions are quantitatively important in our calibration, attenuating welfare responses to tariffs by 40 percent and increasing the trade elasticity by 50 percent. Eliminating search costs raises welfare by 1 percent and increasing them by only a few dollars has the same effects on welfare and trade flows as a 10 percent tariff.

Suggested Citation

  • Pawel Krolikowski & Andrew H. McCallum, 2016. "Goods-Market Frictions and International Trade," Working Papers 16-35R, Federal Reserve Bank of Cleveland.
  • Handle: RePEc:fip:fedcwq:163501
    DOI: 10.26509/frbc-wp-201635r
    Note: Revision of Working Paper 16-35 originally published in December of 2016
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    3. Giulia Brancaccio & Myrto Kalouptsidi & Theodore Papageorgiou, 2020. "Geography, Transportation, and Endogenous Trade Costs," Econometrica, Econometric Society, vol. 88(2), pages 657-691, March.
    4. Spray, J., 2101. "Search Externalities in Firm-to-Firm Trade," Cambridge Working Papers in Economics 2108, Faculty of Economics, University of Cambridge.
    5. Lincoln, William F. & McCallum, Andrew H., 2018. "The rise of exporting by U.S. firms," European Economic Review, Elsevier, vol. 102(C), pages 280-297.
    6. Clemence Lenoir & Isabelle Mejean & Julien Martin, 2018. "Search Frictions in International Good Markets," 2018 Meeting Papers 878, Society for Economic Dynamics.
    7. Brancaccio, Giulia & Kalouptsidi, Myrto & Papageorgiou, Theodore, 2020. "A guide to estimating matching functions in spatial models," International Journal of Industrial Organization, Elsevier, vol. 70(C).

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    More about this item

    Keywords

    Trade; Frictions;

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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