Trade Policy Uncertainty (Caldara, Iacoviello, Molligo, Prestipino and Raffo)

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We are pleased to host the Trade Policy Uncertainty Index developed by Dario Caldara, Matteo Iacoviello, Patrick Molligo, Andrea Prestipino and Andrea Raffo at the Federal Reserve Board.

Dario Caldara, Matteo Iacoviello, Patrick Molligo, Andrea Prestipino, and Andrea Raffo construct a monthly index of Trade Policy Uncertainty (TPU Index) by counting the frequency of joint occurrences of trade policy and uncertainty terms across major newspapers. The TPU index spikes initially in the 1970s following the Nixon and Ford "shocks" to U.S. trade policy. There are additional increases in TPU resulting from trade tensions with Japan in the 1980s and around the NAFTA negotiations in the mid-1990s. TPU reaches unprecedented levels beginning after the 2016 U.S. Presidential Election and spikes several times in response to heightened tensions between the U.S. and its trading partners, notably China and Mexico.

The paper "The Economic Effects of Trade Policy Uncertainty" constructs three measures of TPU based on newspaper coverage, firms' earnings conference calls, and aggregate data on tariff rates. The paper documents that increases in TPU reduce investment and activity using both firm-level and aggregate data. The paper interprets the empirical results through the lens of a two-country general equilibrium model with nominal rigidities and firms' export participation decisions. In the model as in the data, news and increased uncertainty about higher future tariffs reduce investment and activity.

Cite the paper as: Caldara, Dario, Matteo Iacoviello, Patrick Molligo, Andrea Prestipino, and Andrea Raffo, "The Economic Effects of Trade Policy Uncertainty," revised November 2019, Journal of Monetary Economics, forthcoming.

The FEDS Note "Does Trade Policy Uncertainty Affect Global Economic Activity?" uses evidence on the joint movements in TPU, industrial production, and other macroeconomic and financial variables in order to provide an estimate of the effects of the 2018-2019 spikes in TPU on U.S. GDP, as well as GDP in advanced foreign economies (AFEs) and emerging market economies (EMEs).

Cite the FEDS Note as: Caldara, Dario, Matteo Iacoviello, Patrick Molligo, Andrea Prestipino, and Andrea Raffo, "Does Trade Policy Uncertainty Affect Global Economic Activity?," September 4 2019.