Trade Protection, Stock-Market Returns, and Welfare
This paper develops a methodology to assess the expected impact of trade-policy announcements on aggregate welfare using financial market reactions. We use an infinite-horizon specific factors model of production to map the present discounted value of firm cash flows into aggregate welfare. We show that the policy-induced movement in the present value of firm cash flows—a variable that can be estimated from financial data—encapsulates the welfare impact of the tariffs. After applying our framework to the data, we find that the U.S.-China trade war lowered U.S. welfare by three percent.
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