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Trade, Inventories, and International Business Cycles

Author

Listed:
  • Virgiliu Midrigan

    (New York University)

  • Joe Kaboski

    (University of Notre Dame)

  • George Alessandria

    (Federal Reserve Bank of Philadelphia)

Abstract

The large, persistent fluctuations in international trade that can not be explained in standard models by either changes in expenditures or relative prices are often attributed to trade wedges. We show that these trade wedges can reflect the decisions of importers to change their inventory holdings. We find that a two country model of international business cycles with an inventory management decision can generate trade flows and wedges consistent with the data. We find that modelling trade in this way alters the international transmission of business cycles. Specifically, real net exports become less procyclical and consumption becomes less correlated across countries.

Suggested Citation

  • Virgiliu Midrigan & Joe Kaboski & George Alessandria, 2012. "Trade, Inventories, and International Business Cycles," 2012 Meeting Papers 762, Society for Economic Dynamics.
  • Handle: RePEc:red:sed012:762
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    References listed on IDEAS

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    1. Baxter, Marianne & Crucini, Mario J, 1995. "Business Cycles and the Asset Structure of Foreign Trade," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(4), pages 821-854, November.
    2. Fabio Ghironi & Marc J. Melitz, 2005. "International Trade and Macroeconomic Dynamics with Heterogeneous Firms," The Quarterly Journal of Economics, Oxford University Press, pages 865-915.
    3. Ananth Ramanarayanan & Costas Arkolakis, 2009. "Vertical Specialization and International Business Cycle Synchronization," 2009 Meeting Papers 780, Society for Economic Dynamics.
    4. George Alessandria & Horag Choi, 2007. "Do Sunk Costs of Exporting Matter for Net Export Dynamics?," The Quarterly Journal of Economics, Oxford University Press, vol. 122(1), pages 289-336.
    5. Jonathan Eaton & Samuel Kortum & Brent Neiman & John Romalis, 2016. "Trade and the Global Recession," American Economic Review, American Economic Association, pages 3401-3438.
    6. Boileau, Martin, 1999. "Trade in capital goods and the volatility of net exports and the terms of trade," Journal of International Economics, Elsevier, pages 347-365.
    7. Aubhik Khan & Julia K. Thomas, 2007. "Inventories and the Business Cycle: An Equilibrium Analysis of ( S , s ) Policies," American Economic Review, American Economic Association, pages 1165-1188.
    8. Costas Arkolakis & Ananth Ramanarayanan, 2009. "Vertical Specialization and International Business Cycle Synchronization," Scandinavian Journal of Economics, Wiley Blackwell, pages 655-680.
    9. Huang, Kevin X.D. & Liu, Zheng, 2007. "Business cycles with staggered prices and international trade in intermediate inputs," Journal of Monetary Economics, Elsevier, pages 1271-1289.
    10. Engel, Charles & Wang, Jian, 2011. "International trade in durable goods: Understanding volatility, cyclicality, and elasticities," Journal of International Economics, Elsevier, pages 37-52.
    11. Engel, Charles & Wang, Jian, 2011. "International trade in durable goods: Understanding volatility, cyclicality, and elasticities," Journal of International Economics, Elsevier, pages 37-52.
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    Cited by:

    1. Alessandria, George & Kaboski, Joseph & Midrigan, Virgiliu, 2013. "Trade wedges, inventories, and international business cycles," Journal of Monetary Economics, Elsevier, pages 1-20.
    2. Rudolfs Bems & Robert C. Johnson & Kei-Mu Yi, 2013. "The Great Trade Collapse," Annual Review of Economics, Annual Reviews, vol. 5(1), pages 375-400, May.
    3. George Alessandria, 2013. "The great trade collapse (and recovery)," Business Review, Federal Reserve Bank of Philadelphia, issue Q1, pages 1-10.

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