Inventories, Lumpy Trade, and Devaluations

68 Pages Posted: 15 Feb 2008

See all articles by George Alessandria

George Alessandria

Federal Reserve Bank of Philadelphia

Joseph P. Kaboski

Ohio State University (OSU) - Economics; National Bureau of Economic Research (NBER); University of Notre Dame - Department of Economics

Virgiliu Midrigan

affiliation not provided to SSRN

Date Written: January 2008

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: Fixed costs, delivery lags, inventory, devaluation

JEL Classification: E31, F12

Suggested Citation

Alessandria, George A. and Kaboski, Joseph P. and Midrigan, Virgiliu, Inventories, Lumpy Trade, and Devaluations (January 2008). FRB of Philadelphia Working Paper No. 08-3. Available at SSRN: https://ssrn.com/abstract=1092215 or http://dx.doi.org/10.2139/ssrn.1092215

George A. Alessandria (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States
(215) 574-6402 (Phone)
(215) 574-4364 (Fax)

Joseph P. Kaboski

Ohio State University (OSU) - Economics ( email )

410 Arps Hall
1945 N. High St.
Columbus, OH 43210-1172
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of Notre Dame - Department of Economics ( email )

Notre Dame, IN 46556
United States

Virgiliu Midrigan

affiliation not provided to SSRN

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