Working Paper: NBER ID: w18191
Authors: George Alessandria; Joseph Kaboski; Virgiliu Midrigan
Abstract: The large, persistent fluctuations in international trade that can not be explained in standard models by changes in expenditures and 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. Moreover, matching trade flows alters the international transmission of business cycles. Specifically, real net exports become countercyclical and consumption is less correlated across countries than in standard models. We also show that ignoring inventories as a source of trade wedges substantially overstates the role of trade wedges in business cycle fluctuations.
Keywords: international trade; business cycles; inventory management; trade wedges
JEL Codes: F41; F44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade wedges (F16) | inventory management decisions (M11) |
| inventory management decisions (M11) | trade flows (F10) |
| trade flows (F10) | business cycle dynamics (E32) |
| ignoring inventories (G31) | overestimation of trade wedges (F14) |
| inventory management decisions (M11) | cyclicality of real net exports (F44) |
| local inventory levels (L81) | consumption patterns (D10) |
| inventory adjustments (L81) | fluctuations in trade (F19) |
| inventory adjustments (L81) | fluctuations in business cycles (E32) |