The Trumpian World As Natural Experiment

The Trump economic policy regime (if it can be called that) has provided several “natural experiments”. Do corporate tax rate reductions “pay for themselves”? Does expansionary fiscal policy at full employment lead to large increases in output? Does increasing trade protection necessarily lead to an increase in the trade balance? Does a bellicose and confused trade negotiating stance accelerate fixed investment? I think the answers are No, No, No, and No. On this last point, see Altig et al. on Macroblog:

Here is an interesting correlation that is supportive of Altig et al.’s views.

(Click on image to enlarge)

Figure 1: Log nonresidential fixed investment detrended using Hamilton’s procedure (blue, left scale), and Trade Policy Uncertainty (red, right log scale). Light orange shading denotes period during which China has retaliated against US Section 301 tariffs. Source: BEA,

Note that trade policy uncertainty as measured by Baker, Bloom, and Davis rose substantially above the 1985-2016 average in the first quarter of 2018, when Mr. Trump declared his intent to impose sanctions under Section 232 and Section 301.

The increase in trade policy uncertainty is associated with an increase in global economic policy uncertainty. The correlation is much less marked for economic policy uncertainty and the global index.

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Figure 2: Log US trade policy uncertainty categorical index (red, left scale), and log global economic policy uncertainty (green, right scale). NBER defined recession dates shaded gray. Orange shading denotes period in which China retaliates against US Section 301 tariffs. Source:, NBER, and author’s calculations.

If you want to scare yourself, plot the trade policy uncertainty index unlogged…

Disclosure: None.

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