Working Paper: NBER ID: w24353
Authors: Alessandro Barattieri; Matteo Cacciatore; Fabio Ghironi
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.
Keywords: Protectionism; Business Cycle; Macroeconomic Fluctuations; Tariffs
JEL Codes: E31; E52; F13; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Protectionism (F52) | Output falls (Y10) |
| Protectionism (F52) | Inflation rises (E31) |
| Antidumping investigations (F18) | Protectionism (F52) |
| Protectionism (F52) | Trade balance-GDP ratio (F10) |
| Protectionism exacerbates recession (F69) | Output falls (Y10) |
| Protectionism exacerbates recession (F69) | Inflation rises (E31) |
| Protectionism at ZLB (F14) | Output falls (Y10) |
| Protectionism at ZLB (F14) | Inflation rises (E31) |