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Tariffs and the Great Depression Revisited

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  • Mario J. Crucini

    ()
    (Department of Econics, Vanderbilt University)

  • James Kahn

    (Research Department, Federal Reserve Bank of New York)

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.

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Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 0316.

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Date of creation: Aug 2003
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Handle: RePEc:van:wpaper:0316

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Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

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Keywords: Business cycles; great depression; Smoot-Hawley tariff;

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  1. Lee E. Ohanian, 2001. "Why Did Productivity Fall So Much during the Great Depression?," American Economic Review, American Economic Association, American Economic Association, vol. 91(2), pages 34-38, May.
  2. Jordi Galí & Mark Gertler & J. David López-Salido, 2005. "Markups, gaps and the welfare costs of business fluctuations," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 836, Department of Economics and Business, Universitat Pompeu Fabra.
  3. Douglas A. Irwin & Randall S. Kroszner, 1996. "Log-Rolling and Economic Interests in the Passage of the Smoot-Hawley Tariff," University of Chicago - George G. Stigler Center for Study of Economy and State, Chicago - Center for Study of Economy and State 124, Chicago - Center for Study of Economy and State.
  4. Backus, David K & Kehoe, Patrick J, 1992. "International Evidence of the Historical Properties of Business Cycles," American Economic Review, American Economic Association, American Economic Association, vol. 82(4), pages 864-88, September.
  5. V.V. Chari & Patrick J. Kehoe & Ellen McGrattan, 2004. "Business Cycle Accounting," NBER Working Papers 10351, National Bureau of Economic Research, Inc.
  6. 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, Cambridge University Press, vol. 57(04), pages 802-826, December.
  7. Robert E. Hall, 1997. "Macroeconomic Fluctuations and the Allocation of Time," NBER Working Papers 5933, National Bureau of Economic Research, Inc.
  8. 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.
  9. 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).
  10. Casey B. Mulligan, 2002. "A Century of Labor-Leisure Distortions," NBER Working Papers 8774, National Bureau of Economic Research, Inc.
  11. Barry Eichengreen, 1986. "The Political Economy of the Smoot-Hawley Tariff," NBER Working Papers 2001, National Bureau of Economic Research, Inc.
  12. Rogerson, Richard, 1988. "Indivisible labor, lotteries and equilibrium," Journal of Monetary Economics, Elsevier, Elsevier, vol. 21(1), pages 3-16, January.
  13. John Whalley, 1984. "Trade Liberalization among Major World Trading Areas," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262231204, December.
  14. Fabrizio Perri & Vincenzo Quadrini, 2002. "Data Appendix to The Great Depression in Italy: Trade Restrictions and Real Wage Rigidities," Technical Appendices, Review of Economic Dynamics perri02, Review of Economic Dynamics.
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Cited by:
  1. Roman Sustek, 2011. "Monetary Business Cycle Accounting," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(4), pages 592-612, October.
  2. Bridji, Slim, 2013. "The French Great Depression: A business cycle accounting analysis," Explorations in Economic History, Elsevier, Elsevier, vol. 50(3), pages 427-445.
  3. Naoussi, Claude Francis & Tripier, Fabien, 2013. "Trend shocks and economic development," Journal of Development Economics, Elsevier, Elsevier, vol. 103(C), pages 29-42.

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