Inventories, Lumpy Trade, and Large Devaluations

57 Pages Posted: 13 Feb 2008 Last revised: 7 Sep 2010

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 Midrigin

New York University (NYU) - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: February 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, 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.

Suggested Citation

Alessandria, George A. and Kaboski, Joseph P. and Midrigin, Virgiliu, Inventories, Lumpy Trade, and Large Devaluations (February 2008). NBER Working Paper No. w13790. Available at SSRN: https://ssrn.com/abstract=1092818

George A. Alessandria (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

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Joseph P. Kaboski

Ohio State University (OSU) - Economics ( email )

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National Bureau of Economic Research (NBER) ( email )

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University of Notre Dame - Department of Economics ( email )

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United States

Virgiliu Midrigin

New York University (NYU) - Department of Economics ( email )

269 Mercer Street, 7th Floor
New York, NY 10011
United States

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