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Protection and the Business Cycle

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  • Kyle Bagwell
  • Robert W. Staiger

Abstract

Empirical studies have repeatedly documented the countercyclical nature of trade barriers. In this paper, we propose a simple theoretical framework that is consistent with this and other empirical regularities in the relationship between protection and the business cycle. We examime the ability of countries to maintain efficiency-enhancing reciprocal trade agreements that control their temptation to resort to beggar-thy-neighbor policies, under the requirement that such agreements are self enforcing. We find theoretical supposr for countercyclical movements in protection levels, as the fast growth in trade volume that is associated with a boom phase facilitates the maintenance of more liberal trade policies than can be sustained during a recession phase in which growth is slow. However, we also find that acyclical increases in the level of trade volume give rise to protection, implying that whether rising imports are met with greater liberalization or increased protection depends on whether they are part of a cyclic upward trend in trade volume or an acyclical increase in import levels.

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Bibliographic Info

Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 1130.

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Date of creation: May 1995
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Handle: RePEc:nwu:cmsems:1130

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  1. Kyle Bagwell & Robert W. Staiger, 1995. "Collusion Over the Business Cycle," Discussion Papers 1118, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Grossman, G.M. & Helpman, E., 1992. "Protection for Sale," Papers 162, Princeton, Woodrow Wilson School - Public and International Affairs.
  3. Rotemberg, Julio J & Saloner, Garth, 1986. "A Supergame-Theoretic Model of Price Wars during Booms," American Economic Review, American Economic Association, vol. 76(3), pages 390-407, June.
  4. Hansen, John Mark, 1990. "Taxation and the political economy of the tariff," International Organization, Cambridge University Press, vol. 44(04), pages 527-551, September.
  5. David Backus & Patrick J. Kehoe & Finn E. Kydland, 1992. "Dynamics of the Trade Balance and the Terms of Trade: The S-Curve," NBER Working Papers 4242, National Bureau of Economic Research, Inc.
  6. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
  7. Jean-Pierre DANTHINE & John B. DONALDSON, 1991. "Methodological and Empirical Issues in Real Business Cycle Theory," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9102, Université de Lausanne, Faculté des HEC, DEEP.
  8. Bohara, Alok K & Kaempfer, William H, 1991. "A Test of Tariff Endogeneity in the United States," American Economic Review, American Economic Association, vol. 81(4), pages 952-60, September.
  9. repec:att:wimass:9602 is not listed on IDEAS
  10. Abreu, Dilip, 1986. "Extremal equilibria of oligopolistic supergames," Journal of Economic Theory, Elsevier, vol. 39(1), pages 191-225, June.
  11. Baldwin, Richard, 1987. "Politically realistic objective functions and trade policy PROFs and tariffs," Economics Letters, Elsevier, vol. 24(3), pages 287-290.
  12. Kyle Bagwell & Robert W. Staiger, 1988. "A Theory of Managed Trade," NBER Working Papers 2756, National Bureau of Economic Research, Inc.
  13. Kyle Bagwell & Robert W. Staiger, 1996. "Reciprocal Trade Liberalization," NBER Working Papers 5488, National Bureau of Economic Research, Inc.
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Cited by:
  1. Conconi, Paola & Sahuguet, Nicolas, 2005. "Re-election Incentives and the Sustainability of International Cooperation," CEPR Discussion Papers 5401, C.E.P.R. Discussion Papers.
  2. Chad Bown & Meredith Crowley, 2011. "Import protection, business cycles, and exchange rates: evidence from the Great Recession," Working Paper Series WP-2011-16, Federal Reserve Bank of Chicago.
  3. Simon P. Anderson & Nicolas Schmitt, 2000. "Non-Tariff Barriers and Trade Liberalization," Virginia Economics Online Papers 340, University of Virginia, Department of Economics.
  4. Kyle Bagwell & Robert W. Staiger, 2000. "GATT-Think," NBER Working Papers 8005, National Bureau of Economic Research, Inc.
  5. Kyle Bagwell & Robert W. Staiger, 2004. "Enforcement, Private Political Pressure and the GATT/WTO Escape Clause," NBER Working Papers 10987, National Bureau of Economic Research, Inc.
  6. Liu, Xuan, 2007. "Trade Openness and the Cost of Sudden Stops: The Role of Financial Friction," MPRA Paper 18260, University Library of Munich, Germany, revised 26 Oct 2009.
  7. Richard Chisik, 2010. "Trade Disputes, Quality Choice, and Economic Integration," Working Papers 022, Ryerson University, Department of Economics.
  8. Hazel Parcon, 2008. "Disaggregating PTAs at the Role of International Division of Labor on PTA Formation," Working Papers 200806, University of Hawaii at Manoa, Department of Economics.
  9. Opp, Marcus M., 2010. "Tariff wars in the Ricardian Model with a continuum of goods," Journal of International Economics, Elsevier, vol. 80(2), pages 212-225, March.

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