Inventories, lumpy trade, and large devaluations

George Alessandria, Joseph Kaboski and Virgiliu Midrigan

No 08-3, Working Papers from Federal Reserve Bank of Philadelphia

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, the authors document these facts. They 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. The authors' study of 6 current account reversals following large devaluation episodes in the last decade provides strong support for the model?s predictions.

Keywords: Inventories; Trade (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-opm
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Related works:
Journal Article: Inventories, Lumpy Trade, and Large Devaluations (2010)
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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