Two-Country HANK and trade friction

Area of Science:

• Economics
• International Trade
• Macroeconomics

Background:

• Existing models like Representative Agents and Small Open Economy Heterogeneous Agents do not fully capture wealth distribution dynamics.
• Mutual investments in foreign illiquid assets create a heterogeneous and endogenous channel impacting economies.
• Understanding wealth distribution and inequality is crucial in international economic analysis.

Purpose of the Study:

• To develop a Two-Country Heterogeneous Agents New Keynesian model.
• To analyze the impacts of trade barriers and trade wars on economic structures and wealth distribution.
• To explore the conditions under which trade wars occur and their consequences for countries with differing economic scales and productivities.

Main Methods:

• Development of a novel Two-Country Heterogeneous Agents New Keynesian model.
• Simulation and analysis of symmetric and asymmetric economic scenarios under trade war conditions.
• Examination of the role of technology and trade detours in mitigating losses from trade friction.

Main Results:

• In symmetric economies, the initiator of tariffs suffers greater losses; simultaneous tariffs harm both nations.
• Asymmetric economies experience trade wars initiated by larger, more productive (high-tech) countries due to lower associated losses.
• Trade wars are implied to occur primarily in asymmetric economic settings.
• Technological advancement and trade detours can significantly reduce losses for the low-tech country.

Conclusions:

• The developed model highlights the critical role of heterogeneity and endogenous investment channels in understanding international economic conflicts.
• Policy implications suggest that technological improvement is a key strategy for low-tech countries to mitigate trade war impacts.
• Trade detours offer a viable alternative strategy to reduce economic losses stemming from trade friction.