MACRO AND MICRO: TRADE FRICTION AND WEALTH INEQUALITY IN TWO-COUNTRY HANK

Chenxing Zhang, Yujie Yang and Wenwen Hou
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Chenxing Zhang: Jinhe Center for Economic Research, Xi’an Jiaotong University, Xi’an 710049, P. R. China
Yujie Yang: Jinhe Center for Economic Research, Xi’an Jiaotong University, Xi’an 710049, P. R. China
Wenwen Hou: School of Aerospace Engineering, Xi’an Jiaotong University, Xi’an 710049, P. R. China

The Singapore Economic Review (SER), 2025, vol. 70, issue 06, 1583-1623

Abstract: This paper develops the Two-Country HANK model to analyze the impact of tariffs on economic variables and wealth distribution from both macro and micro perspectives. In Macro analysis, trade wars are likely to only exist in situations of asymmetry between the two countries. In Micro analysis, differences in consumption, investment, and labor decisions between the poor and the rich, resulting from different capital stocks, reshape the wealth structure. In a symmetric economy, on the investment side, the rigid constraint imposed by the level of capital stock leads to inconsistent investment behavior in illiquid assets between the poor and the rich. On the consumption side, tariff increases primarily suppress the consumption of imported goods by the poor, while their impact on the consumption of the rich is limited. In an asymmetric economy, the widening gaps in consumption and labor resulting from differential tariff sensitivity between the rich and the poor exacerbate wealth distribution. This paper suggests the implementation of differentiated policies to navigate the economy out of recession.

Keywords: Two-country HANK; tariffs; economic structures; inequality (search for similar items in EconPapers)
JEL-codes: C68 D10 E44 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1142/S0217590824500097

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