This paper examines the role of inventories in the decline of production, trade, and expenditures in the United States in the economic crisis of late 2008 and 2009. Empirically, the paper shows that international trade declined more drastically than trade-weighted production or absorption and there was a sizable inventory adjustment. This is most clearly evident for automobile, the industry with the largest drop in trade. However, relative to the magnitude of the U.S. downturn, these movements in trade are quite typical. The paper develops 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 U.S. recessions.
ASJC Scopus subject areas
- Business, Management and Accounting(all)
- Economics, Econometrics and Finance(all)