Abstract
We simulate a New Keynesian multi-country model of the world economy to assess the macroeconomic effects of US tariffs imposed on one country in 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 binds, then the tariff has recessionary effects on the whole EA, even if it is imposed on only one EA country and the RW. Third, if the ELB binds and the real wage is flexible in the EA country subject to the tariff, or if there is sector-specific matching 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 bind.
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