Precautionary Protectionism

48 Pages Posted: 1 Aug 2022 Last revised: 6 Aug 2022

See all articles by Sharon Traiberman

Sharon Traiberman

New York University (NYU) - New York University

Martin Rotemberg

New York University (NYU) - New York University

Date Written: July 2022

Abstract

We develop a dynamic extension of Dornbusch et al. (1977) with “rustiness”: the home country has relatively higher unit costs tomorrow for goods it is not producing today. We solve for optimal tariff policy when there is a potential for a crisis: an increase in demand for goods produced abroad. Optimally, the home planner never protects goods where comparative advantage is sufficiently low, not even the goods directly affected by the crises. However, for marginally competitive goods, the optimal policy trades off comparative advantage and demand. The extent of industrial policy is non-monotonic in both the size of the demand shock and in its variance.

Suggested Citation

Traiberman, Sharon and Rotemberg, Martin, Precautionary Protectionism (July 2022). NBER Working Paper No. w30300, Available at SSRN: https://ssrn.com/abstract=4177547

Sharon Traiberman (Contact Author)

New York University (NYU) - New York University

Martin Rotemberg

New York University (NYU) - New York University ( email )

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