Working Paper: NBER ID: w27460
Authors: Stéphane Auray; Michael B. Devereux; Aurlien Eyquem
Abstract: For most of the post WWII period, until recently, trade protectionism followed a downward trend, and was formulated in multilateral or bilateral agreements between countries. Recently however, there hasbeen a sharp shift towards unilateral, discretionary trade policy focused on short term macroeconomic objectives, and as a consequence, the use of trade policy has become entangled with that of monetary policy. This paper explores the consequences of this shift within a standard DSGE open economy macroeconomic model. We find that a discretionary non-cooperative approach to trade policy can significantly worsen macroeconomic conditions. Moreover, the stance of monetary policy has major implications for the degree of protection in a non-cooperative equilibrium. In particular, cooperative determination of monetary policy implies an increase in both equilibrium tariffs and inflation, and a significant fall in welfare. By contrast, when the exchange rate is pegged by one country, equilibrium rates of protection are generally lower, but in this case, there are multiple asymmetric equilibria in tariff rates which benefit one country relative to another. We also explore the determination of non-cooperative tariffs in a situation where monetary policy is constrained by the zero lower bound on nominal interest rates.
Keywords: No keywords provided
JEL Codes: F30; F40; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| discretionary noncooperative approach to trade policy (F13) | worsen macroeconomic conditions (E66) |
| high tariff rates (F13) | increased inflation (E31) |
| high tariff rates (F13) | reduced welfare (I38) |
| cooperative monetary policy (E52) | higher equilibrium tariffs (F14) |
| cooperative monetary policy (E52) | higher inflation (E31) |
| higher equilibrium tariffs (F14) | significant welfare losses (D69) |
| pegging exchange rate (F31) | lower equilibrium protection rates (D50) |
| trade wars (F19) | high equilibrium rates of protection (F52) |
| high equilibrium rates of protection (F52) | increased inflation (E31) |
| high equilibrium rates of protection (F52) | reduced welfare (I38) |
| reduced welfare (I38) | decreased consumption (E21) |
| reduced welfare (I38) | decreased output (P44) |