Discussion Paper Details

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Title: Innovation and Trade Policy in a Globalized World

Author(s): Ufuk Akcigit, Sina T. Ates and Giammario Impullitti

Publication Date: February 2021

Keyword(s): economic growth, innovation policy, Open economy and trade policy

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

Abstract: What is the role of innovation policy in open economy? We address this question employ- ing a new innovation-driven growth model with two large open economies at different stages of development. We examine the implications of the U.S. Research and Experimentation Tax Credit, introduced in 1981, and alternative protectionist policies. Key findings are: First, the tax credit generates substantial gains over medium and long horizons. Second, protectionist measures generate large dynamic losses by distorting the firms' innovation incentives. Third, the optimal R&D subsidy decreases in trade openness. Fourth, the optimal unilateral import tariff is zero for all policy horizons.

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Bibliographic Reference

Akcigit, U, Ates, S and Impullitti, G. 2021. 'Innovation and Trade Policy in a Globalized World'. London, Centre for Economic Policy Research.