Identifying the source of dynamics in disaggregated import data

This paper uses Kennan's (1988) model to separately identify supply-side and demand-side dynamics in US import data. Dynamics arise from both autocorrelated shocks to supply- and demand-side fundamentals, and from lagged adjustment to these shocks. The model consists of a pair of partial adjustment models in which consumers and producers each attempt to follow a stochastic target level of imports subject to a quadratic adjustment cost. The model is applied to quarterly data on US imports of seven narrowly defined commodities: Autos, Beer, Cameras, Wine, Cigars, Tea, and Soap. Two main results emerge. First, adjustment costs are important on both sides of the market. Second, supply-side adjustment costs are larger than demand-side adjustment costs. © 1998 John Wiley & Sons, Ltd.