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

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  • Lind�, Jesper
  • Pescatori, Andrea

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.

Suggested Citation

  • Lind�, Jesper & Pescatori, Andrea, 2017. "The Macroeconomic Effects of Trade Tariffs: Revisiting the Lerner Symmetry Result," CEPR Discussion Papers 12534, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:12534
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    References listed on IDEAS

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    Cited by:

    1. Wilko Bolt & Kostas Mavromatis & Sweder van Wijnbergen, "undated". "The Global Macroeconomics of a Trade War: The EAGLE model on the US-China trade conflict," Tinbergen Institute Discussion Papers 19-015/VIII, Tinbergen Institute.
    2. Agnes Benassy-Quere & Matthieu Bussière & Pauline Wibaux, 2018. "Trade and Currency Weapons," CESifo Working Paper Series 7112, CESifo.
    3. Omar Barbiero & Emmanuel Farhi & Gita Gopinath & Oleg Itskhoki, 2019. "The Macroeconomics of Border Taxes," NBER Macroeconomics Annual, University of Chicago Press, vol. 33(1), pages 395-457.
    4. Eichengreen, Barry & Mehl, Arnaud & Chiţu, Livia, 2019. "Mars or mercury redux: the geopolitics of bilateral trade agreements," Working Paper Series 2246, European Central Bank.
    5. Robert Ambrisko, 2019. "Fiscal Devaluation in a Small Open Economy," Russian Journal of Money and Finance, Bank of Russia, vol. 78(1), pages 67-88, March.
    6. Barry Eichengreen, 2019. "Trade Policy and the Macroeconomy," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 67(1), pages 4-23, March.

    More about this item

    Keywords

    Border Adjustment Tax; Import Tariffs and Export Subsidies; Lerner Condition; Incomplete and Complete Markets; New Keynesian open-economy model; Trade War;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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