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Discussion Paper Details

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Title: Unequal Gains, Prolonged Pain: A Model of Protectionist Overshooting and Escalation

Author(s): Emily Blanchard and Gerald Willmann

Publication Date: September 2018

Keyword(s): Dynamic Political Economy, education, Endogenous Tari, Human Capital, Overlapping Generations, Overshooting, populism and protectionism

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

Abstract: We develop a model of democratic political responses to macroeconomic shocks in the short and long run. We show that when economic adjustment is slower than potential political change, exogenous changes in the global marketplace can trigger populist surges in favor of distortionary economic policies. Applied to trade policy, our model demonstrates that an exogenous terms-of-trade improvement or skill-biased technological change will lead to a spike in protectionism that blunts the younger generation's incentive to acquire education. In the long run, the initial surge in protectionism will gradually diminish if and only if education enables less-skilled workers to catch up with the overall economy. The more unequal the initial distribution of human capital, the greater and longer-lasting the protectionist backlash will be: unequal gains, prolonged pain. Evidence on key data markers suggested by the model exhibits patterns consistent with recent populist support for Brexit and Trump.

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Bibliographic Reference

Blanchard, E and Willmann, G. 2018. 'Unequal Gains, Prolonged Pain: A Model of Protectionist Overshooting and Escalation'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13160