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

55 Pages Posted: 9 Aug 2017

See all articles by Jesper Lindé

Jesper Lindé

Sveriges Riksbank

Andreas Pescatori

International Monetary Fund (IMF)

Multiple version iconThere are 2 versions of this paper

Date Written: July 2017

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; 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)

JEL Classification: E52, E58

Suggested Citation

Lindé, Jesper and Pescatori, Andreas, The Macroeconomic Effects of Trade Tariffs: Revisiting the Lerner Symmetry Result (July 2017). IMF Working Paper No. 17/151. Available at SSRN: https://ssrn.com/abstract=3014081

Jesper Lindé (Contact Author)

Sveriges Riksbank

Brunkebergstorg 11
SE-103 37 Stockholm
Sweden

Andreas Pescatori

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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