In a recent analysis, economists Oleg Itskhoki and Dmitry Mukhin discuss the complexities of tariffs amidst today's interconnected global economy. Their working paper, which revises older literature, introduces the concept of an "optimal macro tariff," highlighting how tariffs can influence trade balances and financial markets. This is particularly relevant following the significant global economic disruptions caused by President Trump's tariffs. They suggest an urgent need to reevaluate tariff policies, especially as the last comparable instance of widespread tariffs occurred during the 1930s, amid the Great Depression.
"The financial meltdown they triggered was really striking. What happened to the stock market, what happened to bond yields, what happened to the dollar exchange rate... You can't study tariffs anymore without considering what happens in the financial market."
"There was no wave of protectionism after the Great Financial Crisis of 2008 and '09, when unemployment in the U.S. exceeded 10 percent. It seemed like the developed world had shifted to an equilibrium without tariffs."
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