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Tariffs and the Great Depression revisited

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  • Mario J. Crucini
  • James Kahn

Abstract

Drawing on recent business cycle research on the Great Depression, we return to an argument we advanced in a 1996 article in the Journal of Monetary conomics - the argument that features of the Hawley-Smoot tariffs could have done more to decrease economic activity than is customarily believed, though not enough to account for the severe decline of the early 1930s. Here we reformulate our argument in a business cycle accounting framework that apportions fluctuations between three types of "wedges": (productive) inefficiency, the consumption-leisure margin, and intertemporal inefficiency. Tariff increases in our model correspond primarily to productive inefficiency in a prototype one-sector model. Moreover, the wedge implied by tariffs during the Depression correlates well with the overall measure of productive inefficiency. Our model fails to produce a labor wedge of any onsequence-persuasive evidence that factors other than tariffs also contributed significantly to the severity of the Depression.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 172.

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Date of creation: 2003
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Handle: RePEc:fip:fednsr:172

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Keywords: Depressions ; Tariff;

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References

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  1. Jordi Galí & Mark Gertler & J. David López-Salido, 2002. "Markups, gaps, and the welfare costs of business fluctuations," Banco de Espa�a Working Papers 0204, Banco de Espa�a.
  2. V.V. Chari & Patrick J. Kehoe & Ellen McGrattan, 2004. "Business Cycle Accounting," NBER Working Papers 10351, National Bureau of Economic Research, Inc.
  3. Douglas A. Irwin & Randall S. Kroszner, 1996. "Log-Rolling and Economic Interests in the Passage of the Smoot-Hawley Tariff," NBER Working Papers 5510, National Bureau of Economic Research, Inc.
  4. Hall, Robert E, 1997. "Macroeconomic Fluctuations and the Allocation of Time," Journal of Labor Economics, University of Chicago Press, vol. 15(1), pages S223-50, January.
  5. Casey B. Mulligan, 2002. "A Century of Labor-Leisure Distortions," NBER Working Papers 8774, National Bureau of Economic Research, Inc.
  6. Fabrizio Perri & Vincenzo Quadrini, 2002. "Data Appendix to The Great Depression in Italy: Trade Restrictions and Real Wage Rigidities," Technical Appendices perri02, Review of Economic Dynamics.
  7. Lee E. Ohanian, 2001. "Why Did Productivity Fall So Much during the Great Depression?," American Economic Review, American Economic Association, vol. 91(2), pages 34-38, May.
  8. David K. Backus & Patrick J. Kehoe, 1992. "International Evidence on the Historical Properties of Business Cycles," Working Papers 92-5, New York University, Leonard N. Stern School of Business, Department of Economics.
  9. Casey B. Mulligan, 2002. "A Dual Method of Empirically Evaluating Dynamic Competitive Equilibrium Models with Market Distortions, Applied to the Great Depression & World War II," NBER Working Papers 8775, National Bureau of Economic Research, Inc.
  10. Richard Rogerson, 2010. "Indivisible Labor, Lotteries and Equilibrium," Levine's Working Paper Archive 250, David K. Levine.
  11. Barry Eichengreen, 1986. "The Political Economy of the Smoot-Hawley Tariff," NBER Working Papers 2001, National Bureau of Economic Research, Inc.
  12. Crucini, M.J. & Kahn, J., 1994. "Tarrifs and Aggregate Economic Activity: Lessons from the Great Depression," RCER Working Papers 383, University of Rochester - Center for Economic Research (RCER).
  13. McDonald, Judith A. & O'Brien, Anthony Patrick & Callahan, Colleen M., 1997. "Trade Wars: Canada's Reaction to the Smoot-Hawley Tariff," The Journal of Economic History, Cambridge University Press, vol. 57(04), pages 802-826, December.
  14. John Whalley, 1984. "Trade Liberalization among Major World Trading Areas," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262231204, December.
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Cited by:
  1. Sustek, Roman, 2009. "Monetary Business Cycle Accounting," MPRA Paper 17518, University Library of Munich, Germany.
  2. Bridji, Slim, 2013. "The French Great Depression: A business cycle accounting analysis," Explorations in Economic History, Elsevier, vol. 50(3), pages 427-445.
  3. Claude Francis Naoussi & Fabien Tripier, 2013. "Trend Shocks and Economic Development," Working Papers 2013-03, CEPII research center.

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