Trade Wedges, Inventories, and International Business Cycles

52 Pages Posted: 9 Jul 2012

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

New York University (NYU)

Multiple version iconThere are 2 versions of this paper

Date Written: May 1, 2012

Abstract

The large, persistent fluctuations in international trade that cannot be explained in standard models by changes in expenditures and relative prices are often attributed to trade wedges. We show that these trade wedges can reflect the decisions of importers to change their inventory holdings. We find that a two-country model of international business cycles with an inventory management decision can generate trade flows and wedges consistent with the data. Moreover, matching trade flows alters the international transmission of business cycles. Specifically, real net exports become countercyclical and consumption is less correlated across countries than in standard models. We also show that ignoring inventories as a source of trade wedges substantially overstates the role of trade wedges in business cycle fluctuations.

Keywords: Inventory, Net Exports, Trade Volatility, International Comovement

JEL Classification: E31, F12

Suggested Citation

Alessandria, George A. and Kaboski, Joseph P. and Midrigan, Virgiliu, Trade Wedges, Inventories, and International Business Cycles (May 1, 2012). FRB of Philadelphia Working Paper No. 12-16. Available at SSRN: https://ssrn.com/abstract=2089015 or http://dx.doi.org/10.2139/ssrn.2089015

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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Virgiliu Midrigan

New York University (NYU)

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New York, NY 10003-711
United States

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