Wednesday, March 19, 2014

What to do? What to do?

Certainly plausible, uncertainty;
In our model, due to fixed costs of ordering associated with transportation, firms hold an inventory of intermediate inputs, but the costs are larger for foreign inputs. We show that in response to a large uncertainty shock in business conditions, whether to productivity or the demand for final products, firms optimally adjust their inventory policy by cutting their orders of foreign intermediates more strongly than orders for domestic intermediates.
In the aggregate, this differential response leads to a bigger contraction and, subsequently, a stronger recovery in international trade flows than in domestic trade. Thus, international trade exhibits more volatility than domestic economic activity.
  • In a nutshell, uncertainty shocks magnify the response of international trade, given the differential cost structure.
Which is from Dennis Novy and Alan Taylor.

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