The macroeconomic impact of trade policy: a new identification approach

Alica Bonk and Chloe Larkou

No 3102, Working Paper Series from European Central Bank

Abstract: This paper examines the effects of trade policy shocks on the US economy using a novel identification strategy that combines narrative information on trade policy changes with stock market data. We introduce a new data set of daily trade policy statements from 2007 to 2019, allowing us to capture a comprehensive range of trade policy actions. By analyzing stock price reactions of trade-exposed and non-trade-exposed firms around these statements, we can identify unanticipated trade policy shocks. Using the local projection method, we analyze asymmetries and non-linearities based on the sign and magnitude of the shocks. We find that the gains from trade liberalizations and the damage from protectionism are of equal magnitude in absolute terms, with no non-linearities observed along this dimension. On the other hand, trade policy shocks originating from trading partners have a stronger impact on the economy than those initiated by the US. Moreover, the implementation of policy changes generates a more significant response than mere announcements. Uncertainty about policymakers’ commitment to planned policy changes leads firms and households to adopt a cautious “wait and see” approach. As an extension, we explore whether using President Trump’s tweets instead of official statements affects our results. JEL Classification: F10, F13, F14, G12, G14

Keywords: protectionism; stock market; tariffs; trade liberalization (search for similar items in EconPapers)
Date: 2025-08
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20253102

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