Presidential Authority over Trade: Imposing Tariffs and Duties
The Macroeconomic Effects of Trade Tariffs: Revisiting the ...€¦ · •Currency peg: •Big drop...
Transcript of The Macroeconomic Effects of Trade Tariffs: Revisiting the ...€¦ · •Currency peg: •Big drop...
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The Macroeconomic Effects of Trade Tariffs: Revisiting the Lerner Symmetry Result Jesper Linde and Andrea Pescatori
EC March 2018
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The views expressed herein are those of the author and should not be attributed to the IMF, its Executive Board, or its management".
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Motivation
• Recent policy proposals include a border adjustment tax (BAT)
• Debate strongly influenced by an old trade theory result (Lerner 1936):
• The exchange rate appreciates (at same rate) • No effect on real allocation and other prices
• How general is the result? • What deviations are quantitatively relevant?
Import tariff + (equal rate) export subsidy
(Lerner Symmetry Theorem)
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What we do
We use a medium-scale two-country DSGE model (SIGMA) to analyze and *quantify*:
• The effects of Import tariffs and export subsidies (Lerner symmetry result) • The role of international asset markets and risk sharing • The role of exchange rate adjustment and currency pegs • The role of anticipation • The role of alternative pricing mechanisms
• Trade wars • CM vs IM • Full symmetric retaliation
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Literature
Trade literature:
No uncertainty: Two goods environment, Lerner (1936); multiple goods, McKinnon (1966), Grossman (1980);
Symmetry breaks down: permanent vs. transitory, Razin and Svensson (1983); Dynamic, RE: Eichengreen (1981,1983)
Previous trade theory results can be overturned when tariffs are uncertain
(Tariff) Uncertainty: Stockman and Dellas (1986) the role of asset markets Barari Lapan (1993);
More recently:
DSGE model, Erceg et al (2017), Amiti et al (2017) – Barbiero et al (2017),
Theory: Costinot Werning (2017)
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Features of the Model
• Medium-scale quantitative DSGE model calibrated to match US data
• Two (identical) countries
• Capital accumulation, financial accelerator, liquidity constrained households
• Trade: Home bias in consumption and investment RER not constant (even with LOP)
• Sticky prices and wages (alternative pricing regimes) • LCP: sticky import prices (low exchange rate pass-through to import prices)
• LCP: pre- or post- tax (tariff/subsidy) pricing (alternative pricing)
• PCP: sticky export prices (full exchange rate pass-through to import prices)
• Real rigidities: consumption habit, investment and import and export adjustment costs
• trade assumed balanced in steady state (Costinot & Werning: not relevant for symmetry)
N.B.: LCP = local-currency invoicing; dollar-invoicing: LCP and PCP* 5
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The Lerner Symmetry Result
• With post-tax pricing, Lerner symmetry holds exactly independently of
• nominal rigidities (sticky import/export prices, sticky wages, LCP or PCP)
• Real rigidities (investment, import/export adjustment costs, habit, liquidity constraint agents)
• Financial accelerator
• Monetary policy rule (except reacting to exchange rate)
• Country size
• Intuition:
• If import tariff and export subsidy have (move by) the same rate
• Full exchange rate adjustment offsets both the import tariff and export subsidy’s distortions (i.e., the ToT is unchanged)
• Assumption TB =0: No fiscal implications
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Lerner Theorem: Mechanics
Deviations from LOP Home country Foreign country Import Phillips curve (Local Currency Pricing)
USD per foreign currency: up USD depreciation
Foreign export prices in foreign units
Foreign marginal costs 7
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Lerner Theorem: Mechanics
Deviations from LOP Home country Foreign country Import Phillips curve
Import tariff
Export subs.
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Lerner Theorem: Mechanics
Assume: deviations from LOP =0 Price stickiness irrelevant
Assume the USD fully adjusts
Exchange rate adjustment mechanism (UIP – consistent with IM) The “equilibrium” exchange rate adjusts, non need for interest rates to move! It is an equilibrium Long-term (equilibrium)
exchange rate
Equilibrium?
Outside the mode: coordination problem (economists can help) 9
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Figure 1: Tariff and subsidy: perfect symmetry
Permanent and anticipated 10p.p. import tariff and export subsidy shock
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Deviations from Symmetry: alter. pricing mechanisms
Lerner symmetry temporarily breaks down under pre-tax pricing (and sticky prices)
LCP: low exchange rate pass-through on import prices (in both countries)
• Pre-import tariff and pre-export subsidy pricing: both tariff and subsidy are like a sales tax (both full pass-through);
• Pre-import tariff pricing: tariff is like a sales tax (full pass-through);
Intuition: Asymmetric pass-through breaks the exchange rate offset on import prices
Low pass-through
full pass-through 11
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Figure 5 Alternative pricing assumption
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Deviations from Symmetry: alter. exch. rate mechanisms
Lerner symmetry permanently breaks down under
• Complete markets
• Wealth insured (no wealth effect from price distortions) …
• … but price distortions remain
Lerner symmetry temporarily breaks down under
• Slow nominal exchange rate adjustment:
• The exchange rate moves (appreciates) too slowly (or never: currency pegs)
• Currency pegs affect world GDP
• Anticipation of the trade policy shock
• The exchange rate moves (appreciates) too early
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Lerner Theorem: Mechanics
Anticipation Exchange rate moves in anticipation
Slow exchange rate adjustment
Same mechanics but past level slows down the adjustment
UIP adj parameter
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Lerner Theorem: Mechanics
Complete Asset Markets log-utility
real rate differential “surprise”
(real) UIP condition
Dollar-expenditures equated across countries RER moves values not volumes insured
Home bias, tariffs, … RER no constant
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Deviations from Lerner
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Deviations from Lerner: currency pegs
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Deviations from the Lerner Symmetry: complete markets
Complete international asset markets
• The first welfare theorem does not hold
• CM do not guarantee efficiency
• CM insure a wealth effect but do not fix price distortions
• World GDP and trade unaffected (the pie does not change)
• Lower welfare at home (lower consumption) higher output and TB
• Nominal rigidities: short-run drop in output
• Exchange rate adjustment only 60% of the shock
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Deviations from Lerner: Complete Markets
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Summary
• Anticipation: • minor negative effect on home output; • global trade and output NOT affected
• Gradual exchange rate adj: • modest output boom at home • global trade and output NOT affected
• Currency peg: • Big drop in foreign output • Global trade and output decline
• Complete markets (permanent effects): • Fall (increase) in domestic consumption (output) , eventually • Global trade/output NOT affected
• Alter. Pricing: • Exchange rate under-shooting; domestic output temporarily gain
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Trade Wars
Retaliation: 20 percent tariff in foreign country
IM: foreign suffers the most
CM: symmetric effects
Symmetric retaliation: BAT in foreign country: No effects
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Trade Wars: Full retaliation
Deviations from LOP Home country Foreign country Equilibrium SHOW TAUM=TAUM* TAUX=TAUX* - IN DIFF – INITIAL LEVELS DON’T MATTER
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Trade Wars: Asymmetric retaliation
Deviations from LOP Home country Foreign country Equilibrium SHOW 2*TAUM=TAUM* TAUX=taum; TAUX*=0
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Trade Wars
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Figure 4: Trade Wars
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Summary
• Fully symmetric retaliation: No effects
• Retaliation: • Global trade and output fall
• Both countries’ output drop
• Permanent effects
• Short-run dynamics determined by nominal rigidities
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