Working Paper

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.

JEL Classification: F4; F1;

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Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Globalization Institute Working Papers

Publication Date: 2013

Number: 137

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.