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Trade Wedges, Inventories, and International Business Cycles

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

No 18191, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: F41 F44 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-dge and nep-opm
Date: 2012-06
Note: EFG IFM ITI
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Published as Alessandria, George & Kaboski, Joseph & Midrigan, Virgiliu, 2013. "Trade wedges, inventories, and international business cycles," Journal of Monetary Economics, Elsevier, vol. 60(1), pages 1-20.

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Journal Article: Trade wedges, inventories, and international business cycles (2013) Downloads
Working Paper: Trade wedges, inventories, and international business cycles (2012) Downloads
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