Inventories, Lumpy Trade, and Large Devaluations / George Alessandria, Joseph Kaboski, Virgiliu Midrigan.

Format:

Book

Author/Creator:

Alessandria, George.

Contributor:

National Bureau of Economic Research.

Kaboski, Joseph.

Midrigan, Virgiliu.

Series:

Working Paper Series (National Bureau of Economic Research) no. w13790.

NBER working paper series no. w13790

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2008.

Summary:

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.

Notes:

Print version record

February 2008.