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The macroeconomic effects of trade tariffs: Revisiting the Lerner symmetry result

Jesper Lindé and Andrea Pescatori

Journal of International Money and Finance, 2019, vol. 95, issue C, 52-69

Abstract: We study the robustness of the Lerner symmetry result in an open economy New Keynesian model with price rigidities. While the Lerner symmetry result, i.e. the absence of allocative and trade-flow effects of an equally-sized change in import tariff and export subsidy, holds up approximately for a number of alternative assumptions, we obtain quantitatively important long-term deviations under complete international asset markets. Direct pass-through of tariffs and subsidies to prices and slow exchange rate adjustment can also generate significant short-term deviations from Lerner. Deviations from symmetry, however, do not necessarily imply an impact on global output and are often limited to a redistribution of production and consumption across countries. Finally, we quantify the macroeconomic costs of a trade war and find that they can be substantial, with permanently lower income and trade volumes. However, a fully symmetric retaliation to an unilaterally imposed border adjustment tax can prevent any sizable adverse real or nominal effects.

Keywords: Import tariffs; Export subsidies; Lerner condition; Incomplete markets; Complete markets; Border adjustment tax; Trade war; New Keynesian open-economy model (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Date: 2019
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Related works:
Working Paper: The Macroeconomic Effects of Trade Tariffs: Revisiting the Lerner Symmetry Result (2018) Downloads
Working Paper: The Macroeconomic Effects of Trade Tariffs; Revisiting the Lerner Symmetry Result (2017) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:95:y:2019:i:c:p:52-69

DOI: 10.1016/j.jimonfin.2019.01.019

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