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

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-.ow effects of an equally-sized change in import tariff and export subsidy, holds up approximately for a numb...

Full description

Saved in:
Bibliographic Details
Published inIDEAS Working Paper Series from RePEc
Main Authors Lindé, Jesper, Pescatori, Andrea
Format Paper
LanguageEnglish
Published St. Louis Federal Reserve Bank of St. Louis 01.01.2018
Subjects
Economic models
Macroeconomics
Symmetry
Tariffs
Trade disputes
Online AccessGet full text

Cover

More Information
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, i.e. the absence of allocative and trade-.ow 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. De- viations from symmetry, however, do not necessarily imply an impact on global output and are often limited to a redistribution of production and consumption across coun- tries. 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.