Abstract: This paper develops an international real business cycle model with inventory investment and input-output structure. With US industry-level trade data, I find empirically and theoretically that inventories work as a buffer that mitigate the international shock transmission across sectors and borders, while input-output structure propagates this transmission. By comparing benchmark model with alternatives that abstract from either mechanisms, I find that only the model with both input-output structure and inventory holdings can match the production and inventory comovement across countries. Meanwhile, introducing inventory holdings reduces the overstated magnitude of shock propagation as implied by a traditional roundabout production model. We can see how shocks are propagated through input-output structure and mitigated by upstream inventory.

Abstract: We develop a dynamic general equilibrium heterogeneous firm model of international trade to study labor dynamics and export dynamics jointly. To export, heterogeneous plants pay sunk costs as well as variable trade costs, which depend on the history of exporting status. Plants' employment decisions are subject to convex and non-convex labor adjustment costs. Matching the model to the salient features on employment, sales and exports in Colombian plant-level data, we recover measures of a range of export and labor adjustment frictions. We relate these measures to those from models that abstract away from either export frictions or labor adjustment frictions. We find that both export dynamics frictions and labor adjustment costs are essential for capturing salient features of data.