International Finance Discussion Papers (IFDP)
May 1988
Adjustment Costs and International Trade Dynamics
Joseph E. Gagnon
Abstract:
This paper develops a model of trader behavior that is characterized by quadra is adjustment costs, imperfect competition, and rational expectations. The model is fitted to data on aggregate trade flows between the United States and three of its largest trading partners. Tests against alternative specifications confirm the importance of imperfect competition and adjustment costs. The hypothesis of rational expectations cannot be rejected. The estimated price elasticities of trade flows are generally in the range reported by previous researchers, but the activity elasticities are significantly higher.
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