Inventories, Lumpy Trade, and Large Devaluations

Abstract

We document that economies of scale in transportation and delivery lags are important features of international trade.These costs lead …rms to import infrequently and hold substantially larger inventories of imported goods.We study a model economy in which international trade is subject to these frictions.When we calibrate our theory to the inventory levels and lumpiness of imports observed in the data, we …nd a large (20 percent) tari¤ equivalent of these frictions, mostly due to inventory carrying costs.These frictions have important consequences not only for the level of trade, but also for the dynamic response of imports and prices in the aftermath of large shocks.We focus on large devaluation episodes in six developing economies.The model predicts, consistent with the data, that desired inventory adjustment in response to a terms-oftrade and interest rate shock generates 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.

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