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  5. Heterogeneity and Aggregate Dynamics
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Heterogeneity and Aggregate Dynamics

Paper Session

Sunday, Jan. 8, 2023 10:15 AM - 12:15 PM (CST)

Sheraton New Orleans, Bayside B
Hosted By: International Society for Inventory Research
  • Chairs:
    Laura Castillo-Martinez, Duke University
  • Alessandra Peter, New York University

The Macroeconomics of Partial Irreversibility

Isaac Baley
,
Pompeu Fabra University and CEPR
Andrés Blanco
,
University of Michigan

Abstract

We investigate the macroeconomic effects of partially irreversible investment arising from a wedge between the buying and selling price of capital. We derive sucient statistics that characterize the implications of irreversibility for three long-run macroeconomic outcomes— capital allocation, capital valuation, and capital fluctuations. Measuring these statistics with investment microdata, we find that irreversibility distorts the allocation of capital, lowers capital valuation, and increases the persistence of capital fluctuations. Corporate income tax cuts, by lowering the deductibility of capital losses due to the price wedge, effectively increase irreversibility and structurally change long-run capital behavior.

Increasing Inventories: The Role of Delivery Times

Maria-Jose Carreras-Valle
,
University of Minnesota and Federal Reserve Bank of Minneapolis

Abstract

U.S. manufacturing inventories have been increasing since 2005, reversing a declining trend that lasted for decades. The rise is observed across U.S. manufacturing industries and types of inventories. While the long term decline is well-understood as a consequence of improvements in transportation and information technology, the reversal of the trend has not yet been studied. This paper explores the role of increasing delivery times due to the creation of global supply chains. As foreign inputs become cheaper, firms choose to source more inputs from abroad, and in par- ticular inputs from China, which face long delivery times and frequent delays. This increases the firms’ exposure to volatility in demand leading to a greater incentive to hold inventories. I build a dynamic trade model that features stochastic delivery times for different inputs in the presence of idiosyncratic demand risk. In this framework, firms face a tradeoff when sourcing inputs from different locations between their relative price and delivery times. I find that the initial decrease in delivery times explains 61% of the decline in inventories from 1992 to 2004, and the increase in reliance on inputs from China, which face longer and more volatile delivery times, explains 34% of the increase in inventories from 2005 to 2018.

Taking Stock of Trade Policy Uncertainty: Evidence from China’s Pre-WTO Accession

George Alessandria
,
University of Rochester and NBER
Shafaat Yar Khan
,
World Bank
Armen Khederlarian
,
University of Rochester

Abstract

We study the effects on international trade from the annual tariff uncertainty about China’s MFN status renewal in the U.S. prior to joining the WTO. We have four main findings. First, in the monthly data trade increases significantly in anticipation of uncertain future increases in tariffs and falls upon renewal. Second, the probability of a tariff increase was perceived to be relatively small, with an average annual probability of non-renewal of about 3.2 percent. Third, what matters more is the expected future tariff rather than the uncertainty around it. We identify these effects using within-year variation in the risk of trade policy changes around the renewal vote and trade flows. We show that an (s, s) inventory model generates this behavior and that variation in the strength of the stockpiling in advance of the vote is increasing in the storability of goods. Fourth, the costs associated with the trade policy induced stockpiling reduce entrants’ incentive to operate in a market with tariff uncertainty. Our results explain why trade may hold up in advance of a prospective policy change, such as Brexit or the U.S.-China escalating tariff war of 2018-19, but may fall sharply even if expected tariff increases do not materialize.
JEL Classifications
  • E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy
  • L1 - Market Structure, Firm Strategy, and Market Performance