Working Paper: NBER ID: w21853
Authors: Chunding Li; John Whalley
Abstract: The 2008 financial crisis did not precipitate global retaliatory trade intervention, in seeming contrast to the Great Depression in 1930s. This paper discusses the influence of model structure in optimal tariff (OT) calculations in explaining this puzzle. We emphasize how earlier literature reports high optimal tariffs in numerical calculation (of a hundred of percent) but only uses simple trade models. We use numerical general equilibrium calibration and simulation methodology to calculate optimal tariffs both with and without retaliation in a series of observationally equivalent models, and explore the influence of model structures on optimal tariff levels. We gradually add more realistic features into basic general equilibrium model, and show sharply decline optimal tariffs, which suggests that trade retaliation incentives effectively disappear with the deepening of globalization in 2008 compared to 1930.
Keywords: No keywords provided
JEL Codes: C63; F11; F13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| simplistic models (C20) | inflated estimates of optimal tariffs (F14) |
| retaliatory trade measures (F13) | optimal tariffs (F13) |
| complexity of the model (C52) | optimal tariffs (F13) |
| adding realistic features (C59) | optimal tariffs (F13) |
| model assumptions (C51) | optimal tariffs (F13) |