Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/215441 
Year of Publication: 
2019
Series/Report no.: 
Sveriges Riksbank Working Paper Series No. 363
Publisher: 
Sveriges Riksbank, Stockholm
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, i.e. the absence of allocative and trade-flow 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 signi.cant 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 an unilaterally imposed border adjustment tax can prevent any sizable adverse real or nominal effects.
Subjects: 
Import Tariffs
Export Subsidies
Lerner Condition
Incomplete Markets
Complete Markets
Border Adjustment Tax
Trade War
New Keynesian open-economy model
JEL: 
E52
E58
Document Type: 
Working Paper

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