Distribution capital and the short- and long-run import demand elasticity
Abstract: International business-cycle models assume that home and foreign goods are poor substitutes. International trade models assume they are close substitutes. This paper constructs a model where this discrepancy is due to frictions in distribution. Imports need to be combined with a local non-traded input, distribution capital, which is slow to adjust. As a result, imported and domestic goods appear as poor substitutes in the short run. In the long run this non-traded input can be reallocated, and quantities can shift following a change in relative prices. Thus the observed substitutability between home and foreign goods gets larger as time passes.
File(s): File format is application/pdf http://www.dallasfed.org/assets/documents/institute/wpapers/2013/0137.pdf
Provider: Federal Reserve Bank of Dallas
Part of Series: Globalization Institute Working Papers
Publication Date: 2013
Pages: 46 pages
Note: Published as: Crucini, Mario J. and J. Scott Davis (2016), "Distribution Capital and the Short- and Long-Run Import Demand Elasticity," Journal of International Economics 100: 203-219.