Inventories, lumpy trade, and large devaluations

George Alessandria (), Joseph P. Kaboski and Virgiliu Midrigan

No WP-08-07, Working Paper Series from Federal Reserve Bank of Chicago

Abstract: 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.

Keywords: Trade; Inventories (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-int
Date: 2008
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Related works:
Working Paper: Inventories, lumpy trade, and large devaluations (2008)
Working Paper: Inventories, Lumpy Trade, and Large Devaluations (2008)
Working Paper: Inventories, lumpy trade, and large devaluations (2008)
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