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Trade Policy Uncertainty, Financial Frictions, and Monetary Policy

Author

Listed:
  • Jingjing Fan

    (China Economics and Management Academy, Central University of Finance and Economics)

  • Feng Shi

    (Business School, Beijing Language and Cultural University)

  • Junzhu Zhao

    (China Economics and Management Academy, Central University of Finance and Economics)

  • Jingming Zhu

    (China Economics and Management Academy, Central University of Finance and Economics)

Abstract

This paper introduces the foreign tariff uncertainty shock in a small open economy model with financial frictions to examine the fluctuations in the main macroeconomic variables and then analyzes which type of monetary policy performs better in terms of stabilizing the macroeconomic variables. We find that a rise in the foreign tariff uncertainty shock leads to a sizable decline in the main macroeconomic variables except for CPI inflation. In addition, the amplification effect of financial frictions aggravates the volatility in the main macroeconomic variables.The CPI inflation targeting rule performs better than the PPI inflation targeting rule in the sense that the former can stabilize the economy better than the latter following the foreign tariff uncertainty shock.

Suggested Citation

  • Jingjing Fan & Feng Shi & Junzhu Zhao & Jingming Zhu, 2023. "Trade Policy Uncertainty, Financial Frictions, and Monetary Policy," Annals of Economics and Finance, Society for AEF, vol. 24(1), pages 193-211, May.
    • Handle: RePEc:cuf:journl:y:2023:v:24:i:1:fanshizhaozhu
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    More about this item

    Keywords

    Foreign tariff uncertainty shock; Financial frictions; Inflation targeting;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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