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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.

Tariff --- Ad valorem tariff --- Border taxes --- Customs (Tariff) --- Customs duties --- Duties --- Fees, Import --- Import controls --- Import fees --- Tariff on raw materials --- Commercial policy --- Indirect taxation --- Revenue --- Customs administration --- Favored nation clause --- Non-tariff trade barriers --- Reciprocity (Commerce) --- Econometric models. --- Exports and Imports --- Foreign Exchange --- Taxation --- Monetary Policy --- Central Banks and Their Policies --- Trade Policy --- International Trade Organizations --- Trade: General --- Public finance & taxation --- Currency --- Foreign exchange --- International economics --- Tariffs --- Exchange rates --- Imports --- Real exchange rates --- Export subsidies --- Taxes --- International trade --- United States

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We propose a macroeconomic model with a nonlinear Phillips curve that has a flat slope when inflationary pressures are subdued and steepens when inflationary pressures are elevated. The nonlinear Phillips curve in our model arises due to a quasi-kinked demand schedule for goods produced by firms. Our model can jointly account for the modest decline in inflation during the Great Recession and the surge in inflation during the Post-Covid period. Because our model implies a stronger transmission of shocks when inflation is high, it generates conditional heteroskedasticity in inflation and inflation risk. Hence, our model can generate more sizeable inflation surges due to cost-push and demand shocks than a standard linearized model. Finally, our model implies that the central bank faces a more severe trade-off between inflation and output stabilization when inflation is high.

Cuba --- Macroeconomics --- Economics: General --- Inflation --- Production and Operations Management --- Banks and Banking --- Economic Theory --- Money and Monetary Policy --- Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data) --- Price Level --- Deflation --- Business Fluctuations --- Cycles --- Prices, Business Fluctuations, and Cycles: Forecasting and Simulation --- Interest Rates: Determination, Term Structure, and Effects --- Macroeconomics: Production --- Agriculture: Aggregate Supply and Demand Analysis --- Prices --- Economic & financial crises & disasters --- Economics of specific sectors --- Banking --- Economic theory & philosophy --- Monetary economics --- Output gap --- Production --- Central bank policy rate --- Financial services --- Demand elasticity --- Economic theory --- Interest rate floor --- Monetary policy --- Currency crises --- Informal sector --- Economics --- Interest rates --- Elasticity

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We develop a microfounded New Keynesian model to analyze monetary policy and financial stability issues in open economies with financial fragilities and weakly anchored inflation expectations. We show that foreign exchange intervention (FXI) and capital flow management tools (CFMs) can improve monetary policy tradeoffs under some conditions, including by reducing the need for procyclical tightening in response to capital outflow pressures. Moreover, they can be used in a preemptive way to reduce the risk of a “sudden stop” through curbing a buildup in leverage. While these tools can materially improve welfare, mainly by dampening inefficient fluctuations in risk premia, our analysis also highlights potential limitations, including the possibility that their deployment may forestall needed adjustment in the external balance. Finally, our results also emphasize the power of FXIs to provide domestic stimulus in a liquidity trap.

Macroeconomics --- Economics: General --- Exports and Imports --- Foreign Exchange --- Inflation --- Finance: General --- Quantitative Policy Modeling --- Monetary Policy --- Central Banks and Their Policies --- Open Economy Macroeconomics --- International Investment --- Long-term Capital Movements --- Price Level --- Deflation --- International Financial Markets --- Economic & financial crises & disasters --- Economics of specific sectors --- International economics --- Currency --- Foreign exchange --- Finance --- Sudden stops --- Balance of payments --- Prices --- Currency markets --- Financial markets --- Exchange rates --- Exchange rate devaluation --- Currency crises --- Informal sector --- Economics --- Capital movements --- Foreign exchange market

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This paper employs a two-country New Keynesian DSGE model to assess the macroeconomic impact of the changes in monetary policy frameworks and the fiscal support in the U.S. and euro area during the pandemic. Moving from a previous target of “below, but close to 2 percent” to a formal symmetric inflation targeting regime in the euro area or from flexible to average inflation targeting in the U.S. is shown to boost output and inflation in both regions. Meanwhile, the fiscal packages approved in the U.S. and the euro area, and a slower withdrawal of fiscal support in the euro area, have a similar impact on output and inflation as changing the monetary policy frameworks . Simultaneously implementing these policies is mutually reinforcing, but insufficient to fully explain the unexpected increase in core inflation during 2021.

Macroeconomics --- Economics: General --- Inflation --- Money and Monetary Policy --- Public Finance --- Banks and Banking --- Price Level --- Deflation --- Monetary Policy --- Central Banks and Their Policies --- Measurement of Economic Growth --- Aggregate Productivity --- Cross-Country Output Convergence --- Interest Rates: Determination, Term Structure, and Effects --- Fiscal Policy --- National Government Expenditures and Related Policies: Infrastructures --- Other Public Investment and Capital Stock --- Economic & financial crises & disasters --- Economics of specific sectors --- Monetary economics --- Public finance & taxation --- Banking --- Economic theory & philosophy --- Prices --- Fiscal stimulus --- Fiscal policy --- Interest rate floor --- Monetary policy --- Public investment spending --- Expenditure --- Central bank policy rate --- Financial services --- Currency crises --- Informal sector --- Economics --- Interest rates --- Public investments --- United States

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This paper employs a two-country New Keynesian DSGE model to assess the macroeconomic impact of the changes in monetary policy frameworks and the fiscal support in the U.S. and euro area during the pandemic. Moving from a previous target of “below, but close to 2 percent” to a formal symmetric inflation targeting regime in the euro area or from flexible to average inflation targeting in the U.S. is shown to boost output and inflation in both regions. Meanwhile, the fiscal packages approved in the U.S. and the euro area, and a slower withdrawal of fiscal support in the euro area, have a similar impact on output and inflation as changing the monetary policy frameworks . Simultaneously implementing these policies is mutually reinforcing, but insufficient to fully explain the unexpected increase in core inflation during 2021.

United States --- Macroeconomics --- Economics: General --- Inflation --- Money and Monetary Policy --- Public Finance --- Banks and Banking --- Price Level --- Deflation --- Monetary Policy --- Central Banks and Their Policies --- Measurement of Economic Growth --- Aggregate Productivity --- Cross-Country Output Convergence --- Interest Rates: Determination, Term Structure, and Effects --- Fiscal Policy --- National Government Expenditures and Related Policies: Infrastructures --- Other Public Investment and Capital Stock --- Economic & financial crises & disasters --- Economics of specific sectors --- Monetary economics --- Public finance & taxation --- Banking --- Economic theory & philosophy --- Prices --- Fiscal stimulus --- Fiscal policy --- Interest rate floor --- Monetary policy --- Public investment spending --- Expenditure --- Central bank policy rate --- Financial services --- Currency crises --- Informal sector --- Economics --- Interest rates --- Public investments