The Great Trade Collapse of 2008-2009: An Inventory Adjustment?
59 Pages Posted: 19 May 2010
Date Written: May , 2010
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: Suggested Citation