Keywords
Inflation
Panel VAR
Policy Endogeneity
Granger Causaility
Tariffs
Impulse Response Function
Trade Protection
Macroeconomic Policy
How to Cite
Abstract
This research examines the interactive relationship between trade protection and inflation using analysis of 9,520 country-year observations. Employing Panel Vector Autoregression (PVAR), Granger causality tests, impulse response functions and policy simulations, a strong evidence of policy endogeneity in the tariff-inflation relationship is found. The key finding reveal an asymmetric causal effect: inflation changes strongly predict future tariff adjustments (χ² = 387.529, p < 0.001), while tariffs do not predict inflation changes (χ² = 6.708, p = 0.082). The observed correlation between protection and price levels results from systematic policy responses rather than direct causal effects of trade policy. The impulse response analysis shows that higher tariffs cause sustained price increases lasting 3 to 4 periods, whereas inflationary shocks lead to immediate tariff reductions. This creates a self-regulating mechanism where protectionist measures eventually diminish through inflation effects. Simulation results indicate that a 10 percentage point tariff increase results in an average of 0.8 percentage points additional inflation, although outcomes vary significantly across countries. These findings support current trade policy debates by demonstrating that moderate tariff hikes incur notable macroeconomic costs, yet political economy forces generally favor trade liberalization following inflationary episodes.
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