The Great Trade Collapse of 2008-2009: An Inventory Adjustment?

59 Pages Posted: 19 May 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 Midrigan

Ohio State University (OSU) - Economics

Date Written: May , 2010

Abstract

This paper examines the role of inventories in the decline of production, trade, and expenditures in the US in the economic crisis of late 2008 and 2009. Empirically, the authors show that international trade declined more drastically than trade-weighted production or absorption and there was a sizeable inventory adjustment. This is most clearly evident for autos, the industry with the largest drop in trade. However, relative to the magnitude of the US downturn, these movements in trade are quite typical. The authors develop a two-country general equilibrium model with endogenous inventory holdings in response to frictions in domestic and foreign transactions costs. With more severe frictions on international transactions, in a downturn, the calibrated model shows a larger decline in output and an even larger decline in international trade, relative to a more standard model without inventories. The magnitudes of production, trade, and inventory responses are quantitatively similar to those observed in the current and previous US recessions.

Keywords: Trade collapse, fixed costs, lags, inventory

JEL Classification: E31, F12

Suggested Citation

Alessandria, George A. and Kaboski, Joseph P. and Midrigan, Virgiliu, The Great Trade Collapse of 2008-2009: An Inventory Adjustment? (May , 2010). FRB of Philadelphia Working Paper No. 10-18. Available at SSRN: https://ssrn.com/abstract=1610270 or http://dx.doi.org/10.2139/ssrn.1610270

George A. Alessandria (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
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(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
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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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