George Alessandria

Inventories, Lumpy Trade, and Large Devaluations

Fixed transaction costs and delivery lags are important costs of international trade. These costs lead firms to import infrequently and hold substantially larger inventories of imported goods than domestic goods. Using multiple sources of data, we document these facts. We then show that a parsimoniously parameterized model economy with importers facing an (S, s)-type inventory management problem successfully accounts for these features of the data. Moreover, the model can account for import and import price dynamics in the aftermath of large devaluations. In particular, desired inventory adjustment in response to a sudden, large increase in the relative price of imported goods creates a short-term trade implosion, an immediate, temporary drop in the value and number of distinct varieties imported, as well as a slow increase in the retail price of imported goods. Our study of 6 current account reversals following large devaluation episodes in the last decade provide strong support for the models predictions.

Pricing-to-Market and the Failure of Absolute PPP

The authors show that deviations from the law of one price in tradable goods are an important source of violations of absolute PPP across countries. Using highly disaggregated export data, they document systematic international price discrimination: at the U.S. dock, U.S. exporters ship the same good to low-income countries at lower prices. This pricing-to-market is about twice as important as any local non-traded inputs, such as distribution costs, in explaining the differences in tradable prices across countries. The authors propose a model of consumer search that generates pricing-to-market. In this model, consumers in low-income countries have a comparative advantage in producing non-traded, non-market search activities and therefore are more price sensitive than consumers in high-income countries. They present cross-country time use evidence and evidence from U.S. export prices that are consistent with the model.

Consumer Search, Price Dispersion, and International Relative Price Fluctuations

This article develops a model of consumer search consistent with the evidence of substantial price dispersion and time spent shopping within countries to study international deviations from the law of one price (LOP) and relative price fluctuations. Search frictions lead firms to price discriminate across markets based on the opportunity cost of search, which depends on the local wage. With productivity and taste shocks estimated from the data, deviations from the LOP are as volatile and persistent as in the data. Fluctuations in relative wages, real exchange rates, and the terms of trade are also consistent with the data.

US Trade and Inventory Dynamics

The authors examine the source of the large fall and rebound in U.S. trade in the recent recession. While trade fell and rebounded more than expenditures or production of traded goods, they find that relative to the magnitude of the downturn, these trade fluctuations were in line with those in previous business cycle fluctuations. The authors argue that the high volatility of trade is attributed to more severe inventory management considerations of firms involved in international trade. They present empirical evidence for autos as well as at the aggregate level that the adjustment of inventory holdings helps explain these fluctuations in trade.

Export dynamics in large devaluations

We study the source and consequences of sluggish export dynamics in emerging markets following large devaluations. We document two main features of exports that are puzzling for standard trade models. First, given the change in relative prices, exports tend to grow gradually following a devaluation. Second, high interest rates tend to suppress exports. To address these features of export dynamics, we embed a model of endogenous export participation due to sunk and per period export costs into an otherwise standard small open economy. In response to shocks to productivity, the interest rate, and the discount factor, we find the model can capture the salient features of export dynamics documented. At the aggregate level, the features giving rise to sluggish exports lead to more gradual net export reversals, sharper contractions and recoveries in output, and endogenous stagnation in labor productivity.

Endogenous financial intermediation and real effects of capital account liberalization

We consider lending and investment under asymmetric information in a small, developing economy. We allow different forms of financial contracts to arise endogenously. Financial intermediaries mitigate a moral hazard problem in investment choice through costly monitoring. We then examine the impact of opening the capital account on both welfare and the structure of lending contracts. Liberalizing the capital account may improve or worsen the efficiency of financial intermediaries, leading to an improvement or worsening of the aggregate composition of investment projects. We show that efficient financial intermediaries in the closed economy are neither necessary nor sufficient for a capital account liberalization to improve welfare.

Consumer Search, Price Dispersion, and International Relative Price Volatility

This paper develops a model of consumer search consistent with the evidence of substantial price dispersion within countries. This model is used to study international relative price fluctuations. Consumer search frictions permit firms to price discriminate across markets based on the local wage of consumers. With price dispersion, the market price of a good does not measure its resource cost. This breaks the tight link between relative quantities and relative prices implied by most models. We show that volatile and persistent fluctuations in relative wages lead to volatile and persistent fluctuations in relative prices at the disaggregate level. These deviations from the law of one price substantially increase international relative price volatility. With productivity and taste shocks, the model generates international business cycles that closely match the data

Violating Purchasing Power Parity

This paper demonstrates that deviations from the law of one price are an important source of violations of absolute PPP across countries. Using highly disaggregated U.S. export data, we document evidence of systematic international price discrimination based on the local wage of consumers in the destination market. We show that most violations from absolute PPP can also be explained by international differences in wages. We find very little additional explanation is due to differences in income per capita. Developing and calibrating a model of pricing-to-market based on search frictions and international productivity differences, we show that pricing-to-market accounts for 62 percent of the relationship between national price levels and income and 100 percent of the deviation from the law of one price. In contrast, the textbook Harrod-Balassa-Samuelson effect accounts for the remaining 38 percent of the relationship between national price levels and income.

Trade Adjustment Dynamics and the Welfare Gains from Trade

We build a micro-founded two-country dynamic general equilibrium model in which trade responds more to a cut in tariffs in the long run than in the short run. The model introduces a time element to the fixed-variable cost trade-off in a heterogeneous producer trade model. Thus, the dynamics of aggregate trade adjustment arise from producer-level decisions to invest in lowering their future variable export costs. The model is calibrated to match salient features of new exporter growth and provides a new estimate of the exporting technology. At the micro level, we find that new exporters commonly incur substantial losses in the first three years in the export market and that export profits are backloaded. At the macro level, the slow export expansion at the producer level leads to sluggishness in the aggregate response of exports to a change in tariffs, with a long-run trade elasticity that is 2.9 times the short-run trade elasticity. We estimate the welfare gains from trade from a cut in tariffs, taking into account the transition period. While the intensity of trade expands slowly, consumption overshoots its new steady-state level, so the welfare gains are almost 15 times larger than the long-run change in consumption. Models without this dynamic export decision underestimate the gains to lowering tariffs, particularly when constrained to also match the gradual expansion of aggregate trade flows.

Trade Integration and the Trade Balance in China

We study China’s growth and integration (trade and financial) in a two-country DSGE model with a dynamic exporting decision, pricing-to-market, incomplete financial markets, and aggregate shocks to trade barriers, productivity, and preferences. We estimate the changes in technology, trade costs, and preferences accounting for the dynamics of China’s gross and net trade flows, export participation, real exchange rate, and growth from 1990 to 2014. We find a large unanticipated decline in bilateral trade barriers with persistent, but not permanent, innovations that include an important gradual, phased-in component. Since the Great Recession, average bilateral barriers have stabilized at low levels even as barriers on Chinese imports have risen substantially relative to exports. Trade stagnation since 2011 largely reflects the completed transition to past trade reforms rather than an increase in trade barriers or reversal in the expected pace of future integration. Trade is forecast to decline almost 1 percent per year starting in 2017. Changes in trade barriers are an important determinant of China’s trade balance and its accumulation of foreign assets, accounting for as much as 70 percent of the foreign assets accumulated by 2014. Shocks to trade barriers and in China are found to have increased ROW consumption by 11.9 percent and employment by 0.6 percent but lowered ROW output by less than 1 percent relative to 1990.