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The Macroeconomic Stabilization Of Tariff Shocks: What Is The Optimal Monetary Response?

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  • Bergin, P. R.
  • Corsetti, G.

Abstract

In the wake of Brexit and Trump trade war, central banks face the need to reconsider the role of monetary policy in managing the inflationary-recessionary effects of hikes in tariffs. Using a New Keynesian model enriched with elements from the trade literature, including global value chains, firm dynamics, and comparative advantage, we show that the optimal monetary response is expansionary. It supports activity and producer prices at the expense of aggravating short-run headline inflation---contrary to the prescription of the standard Taylor rule. This holds all the more when the home currency is dominant in pricing of international trade.

Suggested Citation

  • Bergin, P. R. & Corsetti, G., 2020. "The Macroeconomic Stabilization Of Tariff Shocks: What Is The Optimal Monetary Response?," Cambridge Working Papers in Economics 2026, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:2026
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    References listed on IDEAS

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    1. The Macroeconomic Stabilization Of Tariff Shocks: What Is The Optimal Monetary Response?
      by Christian Zimmermann in NEP-DGE blog on 2020-06-29 20:30:56

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    Cited by:

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    3. Jacquinot, Pascal & Lozej, Matija & Pisani, Massimiliano, 2022. "Macroeconomic effects of tariffs shocks: The role of the effective lower bound and the labour market," Journal of International Money and Finance, Elsevier, vol. 120(C).
    4. Yang, Shanran & Shi, Benye & Yang, Fujia, 2023. "Macroeconomic impact of the Sino–U.S. trade frictions: Based on a two-country, two-sector DSGE model," Research in International Business and Finance, Elsevier, vol. 65(C).
    5. Lloyd, S. P. & Marin, E. A., 2023. "Capital Controls and Free-Trade Agreements," Cambridge Working Papers in Economics 2318, Faculty of Economics, University of Cambridge.
    6. Lloyd, Simon P. & Marin, Emile A., 2024. "Capital controls and trade policy," Journal of International Economics, Elsevier, vol. 151(C).
    7. Ken-ichi Hashimoto & Kaz Miyagiwa & Yoshiyasu Ono & Matthias Schlegl, 2024. "Was Keynes right? A reconsideration of the effect of a protective tariff under stagnation," Working Papers 2409, Florida International University, Department of Economics.
    8. Masashige Hamano & Francesco Pappadà & Maria Teresa Punzi, 2023. "Optimal Monetary Policy, Tariff Shocks and Exporter Dynamics," Working Papers 2309, Waseda University, Faculty of Political Science and Economics.
    9. Chenxin Zhang & Yujie Yang & Wenwen Hou, 2025. "Trade Friction in Two-Country HANK with Financial Friction," Computational Economics, Springer;Society for Computational Economics, vol. 65(1), pages 365-394, January.
    10. Hernández Vega Marco A., 2021. "Tariffs and Macroeconomic Dynamics," Working Papers 2021-25, Banco de México.

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    More about this item

    Keywords

    comparative advantage; optimal monetary policy; production chains; tariff shock; tariff war;
    All these keywords.

    JEL classification:

    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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