Trade frictions, trade policies, and the interwar business cycle

University dissertation from London: School of Economics and Political Science

Author: Thilo Albers; [2018]

Keywords: SAMHĂ„LLSVETENSKAP; SOCIAL SCIENCES;

Abstract: This dissertation is composed of six chapters. Based on a comparison with other recessions throughout history, the first chapter motivates studying the Great Depression from a trade perspective. The second chapter sets the stage for such an endeavour. It introduces a new macroeconomic dataset for the interwar period and investigates the prelude and global impact of the Great Depression. Highlighting the variation of its severity along two dimensions, depth and duration, within and across countries, it conjectures that trade must have played an important role for the global extent of the crisis. The third chapter tests this conjecture by resurrecting the concept of the trade multiplier. Based on a causal estimate of the multiplier and auxiliary data, it demonstrates that the trade channel can explain significant proportions of the initial depth of the Depression in small open economies. If the fall of trade was important for propagating the Depression, analysing trade frictions is imperative. The fourth chapter thus turns to the analysis of retaliatory trade policies in response to currency devaluations. It shows that tariff retaliation was an important feature of interwar protectionism. Its effects on trade were large, which casts doubts on the unqualified favourable assessment of unilateral currency depreciations. Relating to the literature on the post-war distance puzzle, the fifth chapter assesses the relative importance of tariffs and transport costs during the interwar period. Not only were tariffs the dominant trade friction during this period, but their increase rendered distancerelated trade costs relatively less important. Finally, the sixth chapter draws implications for the academic and political discourse.

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