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Adjustment costs and international trade dynamics

  • Joseph E. Gagnon

This paper develops a model of trader behavior that is characterized by quadra is adjustment costs, imperfect competition, and rational expectations. The model is fitted to data on aggregate trade flows between the United States and three of its largest trading partners. Tests against alternative specifications confirm the importance of imperfect competition and adjustment costs. The hypothesis of rational expectations cannot be rejected. The estimated price elasticities of trade flows are generally in the range reported by previous researchers, but the activity elasticities are significantly higher.

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File URL: http://www.federalreserve.gov/pubs/ifdp/1988/321/default.htm
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File URL: http://www.federalreserve.gov/pubs/ifdp/1988/321/ifdp321.pdf
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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 321.

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Date of creation: 1988
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Handle: RePEc:fip:fedgif:321
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  1. Thomas J. Sargent, 1978. "Estimation of dynamic labor demand schedules under rational expectations," Staff Report 27, Federal Reserve Bank of Minneapolis.
  2. Irving B. Kravis & Robert E. Lipsey, 1977. "Price Behavior in the Light of Balance of Payments Theories," NBER Working Papers 0181, National Bureau of Economic Research, Inc.
  3. Jacques R. Artus & John H. Young, 1979. "Fixed and Flexible Exchange Rates: A Renewal of the Debate (Taux de change fixes et taux de change flexibles: reprise du débat) (Tipos de cambio fijos y tipos de cambio flexibles: Reanudación del de," IMF Staff Papers, Palgrave Macmillan, vol. 26(4), pages 654-698, December.
  4. Stephen P. Magee, 1973. "Currency Contracts, Pass-Through, and Devaluation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 4(1), pages 303-325.
  5. Kollintzas, Tryphon E. & Husted, Steven L., 1984. "Distributed lags and intermediate good imports," Journal of Economic Dynamics and Control, Elsevier, vol. 8(3), pages 303-327, December.
  6. Edison, Hali J. & Marquez, Jaime R. & Tryon, Ralph W., 1987. "The structure and properties of the Federal Reserve Board Multicountry Model," Economic Modelling, Elsevier, vol. 4(2), pages 115-315, April.
  7. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  8. Hansen, Lars Peter & Sargent, Thomas J., 1980. "Formulating and estimating dynamic linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 2(1), pages 7-46, May.
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