Working Paper: NBER ID: w16059
Authors: George Alessandria; Joseph P. Kaboski; Virgiliu Midrigan
Abstract: This paper examines the role of inventories in the decline of production, trade, and expenditures in the US in the economic crisis of late 2008 and 2009. Empirically, we show that international trade declined more drastically than trade-weighted production or absorption and there was a sizeable inventory adjustment. This is most clearly evident for autos, the industry with the largest drop in trade. However, relative to the magnitude of the US downturn, these movements in trade are quite typical. We develop a two-country general equilibrium model with endogenous inventory holdings in response to frictions in domestic and foreign transactions costs. With more severe frictions on international transactions, in a downturn, the calibrated model shows a larger decline in output and an even larger decline in international trade, relative to a more standard model without inventories. The magnitudes of production, trade, and inventory responses are quantitatively similar to those observed in the current and previous US recessions.
Keywords: Trade; Inventory Adjustment; Economic Crisis; International Trade Dynamics
JEL Codes: F1; F11; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Decline in international trade (F19) | Decline in production (E23) |
| Inventory adjustments (G31) | Decline in international trade (F19) |
| Inventory-to-sales ratios increased (L81) | Decline in trade (F19) |
| Inventory adjustments (G31) | Imports fell sharply (F14) |
| Inventory adjustments influence trade dynamics (F14) | Observed declines in trade (F19) |