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Tariffs and the Great Depression Revisited

Mario Crucini () and James Kahn ()

No 316, Vanderbilt University Department of Economics Working Papers from Vanderbilt University Department of Economics

Abstract: In this paper we revisit the issues addressed in Crucini and Kahn (1996) in the light of recent research on the Great Depression. In that paper we had argued that particular features of the Hawley-Smoot tariffs could have provided them with a stronger impact than conventional wisdom had held, and we described the magnitudes in a calibrated general equilibrium model. We suggested that while the tariffs could directly account for only a small part of the Great Depression, they nonetheless had a significant, recession-sized impact, "small" only in the context of the Great Depression. Here we reformulate our arguments in the context of the business cycle accounting framework of Chari, Kehoe, and McGrattan (2002) and show that tariff increases in our model correspond primarily to an increased efficiency wedge in a prototype one-sector model. Moreover, the efficiency wedge implied by tariffs correlates well with the productivity wedge measured by CKM. Our model fails to produce a labor wedge of any consquence, which combined with large empirical estimates of the labor wedge in the U.S. by Mulligan (2002a) is the basis of his critique of the role we attribute to tariffs. While we agree that a complete understanding of the Great Depression will require an accounting for the labor wedge, its existence does not in any way contradict our case for a modest e¢ciency effect of the tariff war.

Keywords: Business cycles; great depression; Smoot-Hawley tariff (search for similar items in EconPapers)
JEL-codes: F4 F13 (search for similar items in EconPapers)
Date: 2003-08
New Economics Papers: this item is included in nep-dge and nep-his
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