Trade Wedges, Inventories, and International Business Cycles

52 Pages Posted: 29 Jun 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 Midrigin

New York University (NYU) - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: June 2012

Abstract

The large, persistent fluctuations in international trade that can not 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.

Suggested Citation

Alessandria, George A. and Kaboski, Joseph P. and Midrigin, Virgiliu, Trade Wedges, Inventories, and International Business Cycles (June 2012). NBER Working Paper No. w18191. Available at SSRN: https://ssrn.com/abstract=2096005

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 Midrigin

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

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New York, NY 10011
United States

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