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The Macroeconomic Effects of Trade Tariffs; Revisiting the Lerner Symmetry Result

Jesper Lindé and Andrea Pescatori ()

No 17/151, IMF Working Papers from International Monetary Fund

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 of no real effects of a combined 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. 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 a unilaterally imposed border adjustment tax can prevent any real or nominal effects.

Keywords: Central banks and their policies; Import tariffs; Export subsidies; Incomplete markets; Exchange rate adjustments; Keynesian economics; Economic models; Exchange rate pegs; Import Tariffs, Export Subsidies, Lerner Condition, Incomplete Markets, Complete Markets, Border Adjustment Tax, Trade War, New Keynesian open-economy model, Import Tariffs, Export Subsidies, Lerner Condition, Incomplete Markets, Complete Markets, Monetary Policy (Targets, Instruments, and Effects) (search for similar items in EconPapers)
Pages: 54
Date: 2017-07-07
New Economics Papers: this item is included in nep-int, nep-mac and nep-opm
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Related works:
Journal Article: The macroeconomic effects of trade tariffs: Revisiting the Lerner symmetry result (2019) Downloads
Working Paper: The Macroeconomic Effects of Trade Tariffs: Revisiting the Lerner Symmetry Result (2018) Downloads
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