Trade wedges, inventories, and international business cycles

George Alessandria, Joseph Kaboski, Virgiliu Midrigan

    Research output: Contribution to journalArticlepeer-review

    Abstract

    The large, persistent fluctuations in international trade that cannot 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.

    Original languageEnglish (US)
    Pages (from-to)1-20
    Number of pages20
    JournalJournal of Monetary Economics
    Volume60
    Issue number1
    DOIs
    StatePublished - Jan 2013

    ASJC Scopus subject areas

    • Finance
    • Economics and Econometrics

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