Macroeconomic effects of tariffs shocks: the role of the effective lower bound and the labour market

By Pascal Jacquinot, Matija Lozej and Massimiliano Pisani

http://d.repec.org/n?u=RePEc:ecb:ecbwps:20202434&r=dge

We simulate a version of the EAGLE, a New Keynesian multi-country model of the world economy, to assess the macroeconomic effects of US tariffs imposed on one country member of the euro area (EA), and the rest of the world (RW). The model is augmented with an endogenous effective lower bound (ELB) on the monetary policy rate of the EA and country-specific labour markets with search-and-matching frictions. Our main results are as follows. First, tariffs produce recessionary effects in each country. Second, if the ELB holds, then the tariff has recessionary effects on the whole EA, even if it is imposed on one EA country and the RW. Third, if the ELB holds and the real wage is flexible in the EA country subject to the tariff, or if there are segmented labour markets with directed search within each country, then the recessionary effects on the whole EA are amplified in the short run. Fourth, if the elasticity of substitution among tradables is low, then the tariff has recessionary effects on the whole EA also when the ELB does not hold.

The abstract does not do justice to the paper. This is a four-country model: US, a Euro country (Germany), the rest of the Euro zone, and the rest of the world. The US imposes a new import tariff on the Euro country and the rest of the world (but not the rest of the Euro zone), and the Euro-zone policy response is constrained by a lower bound on the policy rate. The tariff lowers GDP everywhere and increases unemployment everywhere, with the Euro country most affected, of course. The policy constraint matters. Without it, the rest of the Euro-zone would actually gain.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: