Trade wedges,inventories,andinternationalbusinesscycles

The large,persistentfluctuationsininternationaltradethatcannotbeexplainedin standardmodelsbychangesinexpendituresandrelativepricesareoftenattributedto trade wedges.Weshowthatthesetradewedgescanreflectthedecisionsofimportersto changetheirinventoryholdings.Wefindthatatwo-countrymodelofinternational businesscycleswithaninventorymanagementdecisioncangeneratetradeflowsand wedgesconsistentwiththedata.Moreover,matchingtradeflowsalterstheinternational transmissionofbusinesscycles.Specifically,realnetexportsbecomecountercyclicaland consumptionislesscorrelatedacrosscountriesthaninstandardmodels.Wealsoshow that ignoringinventoriesasasourceoftradewedgessubstantiallyoverstatestheroleof trade wedgesinbusinesscyclefluctuations