NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Trade Wedges, Inventories, and International Business Cycles

George Alessandria, Joseph Kaboski, Virgiliu Midrigan

NBER Working Paper No. 18191
Issued in June 2012
NBER Program(s):   EFG   IFM   ITI

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.

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Document Object Identifier (DOI): 10.3386/w18191

Published: Alessandria, George & Kaboski, Joseph & Midrigan, Virgiliu, 2013. "Trade wedges, inventories, and international business cycles," Journal of Monetary Economics, Elsevier, vol. 60(1), pages 1-20. citation courtesy of

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