The Macroeconomic Effects of Trade Tariffs: Revisiting the Lerner Symmetry Result
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Summary:
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.
Series:
Working Paper No. 2017/151
Subject:
Exchange rates Export subsidies Foreign exchange Imports International trade Real exchange rates Tariffs Taxes
English
Publication Date:
July 7, 2017
ISBN/ISSN:
9781484306116/1018-5941
Stock No:
WPIEA2017151
Pages:
54
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