Inventories, Lumpy Trade, and Large Devaluations

63 Pages Posted: 3 Aug 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

Ohio State University (OSU) - Economics

Multiple version iconThere are 2 versions of this paper

Date Written: August 1, 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.

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 Large Devaluations (August 1, 2008). Available at SSRN: https://ssrn.com/abstract=1195782 or http://dx.doi.org/10.2139/ssrn.1195782

George A. Alessandria

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 (Contact Author)

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

Ohio State University (OSU) - Economics ( email )

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

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