On the (de)stabilization role of protectionism: Theory and evidence

Nastasia Henry () and Alain Venditti
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Nastasia Henry: Aix-Marseille Univ., CNRS, AMSE, Marseille, France, https://www.amse-aixmarseille.fr/en/members/henry

No 2328, AMSE Working Papers from Aix-Marseille School of Economics, France

Abstract: To what extent protectionism affects growth and (de)stabilizes the economies? Since 2018, some countries have resorted to protectionist measures as the United States. Although the impacts of protectionism on growth have been widely explored without reaching a consensus, few has been said on its impacts on macroeconomic stability. The present paper attempts to gauge more precisely its implications using a Barro-type (1990) endogenous growth model with public debt and credit constraint where tariffs are a proxy of protectionism. Our main result is to show that when the debt level is high, and the share of foreign goods in total consumption is large enough, increasing tariffs may have a dramatic destabilizing effect generating some expectation coordination failure between multiple equilibria and the possible existence of large self-fulfilling fluctuations. We also exhibit some trade-off between tariffs and growth as tariffs are beneficial only to the low growth equilibrium which may only appear in the globally indeterminate case. We also propose some numerical illustrations confirming the destabilizing impact of tariffs in the case of the US economy. We finally propose an Event Study analysis to confront our results. While our effects appear short lasting, two quarters, we show that the implementation of protectionism destabilizes the US economy in the short run.

Keywords: public debt; tariffs; small open economy; credit constraint; global and local indeterminacy (search for similar items in EconPapers)
JEL-codes: C62 E32 F13 F34 F43 O41 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2023-11
New Economics Papers: this item is included in nep-int
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Working Paper: On the (de)stabilization role of protectionism: Theory and evidence (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:aim:wpaimx:2328

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