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Was Keynes right? A reconsideration of the effect of a protective tariff under stagnation

Author

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  • Hashimoto, Ken-ichi
  • Miyagiwa, Kaz
  • Ono, Yoshiyasu
  • Schlegl, Matthias

Abstract

This paper first presents a dynamic model that features both real and monetary aspects of international trade and is capable of dealing with both full employment and secular unemployment. The model is then utilized to examine the effect of a tariff on the terms of trade, the trade pattern, real consumption, and employment of labor. It is shown that with full employment in both countries, a small tariff by the home country increases its real consumption at the expense of the foreign country by improving the terms of trade. These results however are reversed in the presence of unemployment in both countries. We also examine the asymmetric case and calibrate our model to evaluate numerically the effect of large tariff changes. The main finding is that the effects of tariffs on consumption are opposite in the absence and the presence of unemployment.

Suggested Citation

  • Hashimoto, Ken-ichi & Miyagiwa, Kaz & Ono, Yoshiyasu & Schlegl, Matthias, 2026. "Was Keynes right? A reconsideration of the effect of a protective tariff under stagnation," Macroeconomic Dynamics, Cambridge University Press, vol. 30, pages 1-59, January.
    • Handle: RePEc:cup:macdyn:v:30:y:2026:i::p:e59_59
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