DP286 | Protectionism and the US Trade Deficit: An Empirical Analysis

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The persistence of large trade and budget imbalances has led to increasing demands for protectionist policies. Despite a substantial theoretical literature there appears to be no empirical literature on the use of tariffs as a macroeconomic policy instrument. This paper fills that gap, using the multicountry econometric model (MCM) in a dynamic framework where full employment is not assured. We simulate the effects of using protectionist policies for solving the major imbalances in five major industrialized countries, while preserving growth, over 1986-92. These policies are constrasted with coordination of fiscal and monetary policies and orchestrated realignment of national currencies.