skip to content

Faculty of Economics

CWPE Cover

Dainauskas, J., Lastauskas, P.

Trade Shocks and the Transitional Dynamics of Markups

CWPE2431

Abstract: We show that U.S. trade protectionism shocks cause the cyclical component of the aggregate U.S. price markup to increase significantly over time. However, if trade barrier announcements are covered by the media, which may help form expectations about the future, we find that the aggregate U.S. price markup response is zero upon impact, if not negative, before it eventually rises. We develop a simple canonical model of trade adjustment dynamics driven by habits in consumer preferences that replicates these empirical responses and use it to quantify the welfare implications. In the model, firms cut markups preemptively in anticipation of future trade barriers by factoring in the time that it takes to wean addicted consumers off of imported varieties.

Keywords: Trade Adjustment Dynamics, Trade Protectionism, Announcements, Anticipation, Deep Habits, Welfare Gains from Trade

JEL Codes: C11 C32 F13 F17 F62

Author links:

PDF: https://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe2431.pdf

Open Access Link: https://doi.org/10.17863/CAM.109514