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Title: Protectionism and the Business Cycle

Author(s): Alessandro Barattieri, Matteo Cacciatore and Fabio Ghironi

Publication Date: February 2018

Keyword(s): inflation, liquidity trap, macroeconomic dynamics, protectionism and tariffs

Programme Area(s): International Macroeconomics and Finance and International Trade and Regional Economics

Abstract: We study the consequences of protectionism for macroeconomic fluctuations. First, using high-frequency trade policy data, we present fresh evidence on the dynamic effects of temporary trade barriers. Estimates from country-level and panel VARs show that protectionism acts as a supply shock, causing output to fall and inflation to rise in the short run. Moreover, protectionism has at best a small positive effect on the trade balance. Second, we build a small open economy model with firm heterogeneity, endogenous selection into trade, and nominal rigidity to study the channels through which protectionism affects aggregate fluctuations. The model successfully reproduces the VAR evidence and highlights the importance of aggregate investment dynamics and micro-level reallocations for the contractionary effects of tariffs. We then use the model to study scenarios where temporary trade barriers have been advocated as potentially beneficial, including recessions with binding constraints on monetary policy easing or in the presence of a fixed exchange rate. Our main conclusion is that, in all the scenarios we consider, protectionism is not an effective tool for macroeconomic stimulus.

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Bibliographic Reference

Barattieri, A, Cacciatore, M and Ghironi, F. 2018. 'Protectionism and the Business Cycle'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=12693