Trade Volatility, Business Cycle Synchronization, and Inventory Dynamics

We study the role of inventories for the volatility of international trade and the propagation of business cycles. We build a model of international trade in which intermediaries have a precautionary motive to hold inventories. With either productivity or demand shocks, we find inventories increase the volatility of international trade whenever traded goods have relatively high inventory holdings. Moreover, net exports are now more strongly countercyclical and appear in line with the data. We also find that inventories generate greater comovement of business cycles, particularly from aggregate demand shocks.