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Inventories, lumpy trade, and large devaluations

  • George Alessandria
  • Joseph P. Kaboski
  • Virgiliu Midrigan

Fixed transaction costs and delivery lags are important costs of international trade. These costs lead firms to import infrequently and hold substantially larger inventories of imported goods than domestic goods. Using multiple sources of data, the authors document these facts. They then show that a parsimoniously parameterized model economy with importers facing an (S, s)-type inventory management problem successfully accounts for these features of the data. Moreover, the model can account for import and import price dynamics in the aftermath of large devaluations. In particular, desired inventory adjustment in response to a sudden, large increase in the relative price of imported goods creates a short-term trade implosion, an immediate, temporary drop in the value and number of distinct varieties imported, as well as a slow increase in the retail price of imported goods. The authors' study of 6 current account reversals following large devaluation episodes in the last decade provides strong support for the model’s predictions.

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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 08-3.

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Date of creation: 2008
Date of revision: 01 Sep 2009
Handle: RePEc:fip:fedpwp:08-3
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