Working Paper: NBER ID: w13790
Authors: George Alessandria; Joseph Kaboski; Virgiliu Midrigan
Abstract: 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, we document these facts. We 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. Our study of 6 current account reversals following large devaluation episodes in the last decade provide strong support for the model's predictions.
Keywords: International Trade; Inventory Management; Devaluation; Trade Frictions
JEL Codes: E31; F12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| fixed transaction costs and delivery lags (F16) | firms holding larger inventories of imported goods (F10) |
| fixed transaction costs and delivery lags (F16) | inventory management problems (M11) |
| sudden large increase in the relative price of imported goods (F31) | short-term trade implosion (F69) |
| inventory management frictions (L81) | trade volume dynamics (F14) |
| importers reduce retail markups (L81) | incomplete pass-through of wholesale price increases to consumers (L11) |