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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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File URL: http://www.accessecon.com/pubs/VUECON/vu03-w16.pdf
File Function: First version, 2003
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Bibliographic Info

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. Jordi Galí & Mark Gertler & J. David López-Salido, 2005. "Markups, gaps and the welfare costs of business fluctuations," Economics Working Papers 836, Department of Economics and Business, Universitat Pompeu Fabra.
  2. Lee E. Ohanian, 2001. "Why did productivity fall so much during the Great Depression?," Staff Report 285, Federal Reserve Bank of Minneapolis.
  3. John Whalley, 1984. "Trade Liberalization among Major World Trading Areas," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262231204, December.
  4. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2007. "Business Cycle Accounting," Econometrica, Econometric Society, vol. 75(3), pages 781-836, 05.
  5. 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.
  6. David K. Backus & Patrick J. Kehoe, 1991. "International evidence on the historical properties of business cycles," Staff Report 145, Federal Reserve Bank of Minneapolis.
  7. 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.
  8. Casey B. Mulligan, 2002. "A Century of Labor-Leisure Distortions," NBER Working Papers 8774, 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. 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.
  11. Irwin, Douglas A. & Kroszner, Randall S., 1996. "Log-rolling and economic interests in the passage of the Smoot-Hawley tariff," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 45(1), pages 173-200, December.
  12. Richard Rogerson, 2010. "Indivisible Labor, Lotteries and Equilibrium," Levine's Working Paper Archive 250, David K. Levine.
  13. Robert E. Hall, 1998. "Macroeconomic Fluctuations and the Allocation of Time," NBER Working Papers 5933, National Bureau of Economic Research, Inc.
  14. Barry Eichengreen, 1986. "The Political Economy of the Smoot-Hawley Tariff," NBER Working Papers 2001, National Bureau of Economic Research, Inc.
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Cited by:
  1. Sustek, Roman, 2009. "Monetary Business Cycle Accounting," MPRA Paper 17518, University Library of Munich, Germany.
  2. Claude Francis Naoussi & Fabien Tripier, 2013. "Trend Shocks and Economic Development," Working Papers 2013-03, CEPII research center.
  3. Bridji, Slim, 2013. "The French Great Depression: A business cycle accounting analysis," Explorations in Economic History, Elsevier, vol. 50(3), pages 427-445.

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