Working Paper: CEPR ID: DP12534
Authors: Jesper Lind; Andrea Pescatori
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 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 a 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
JEL Codes: E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| 10% Border Adjustment Tax (H25) | Domestic Output (E23) |
| 10% Border Adjustment Tax (H25) | Foreign Output (F29) |
| Import Tariffs + Export Subsidies (F14) | Real Economic Variables (E39) |
| Symmetric Retaliation to Border Adjustment Tax (H22) | Adverse Real/Nominal Effects (E43) |
| Trade Wars (F19) | Macroeconomic Costs (E39) |
| Trade Policies (F13) | Redistribution of Production and Consumption (D39) |