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

Author

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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. Maurice Obstfeld & Kenneth Rogoff, 2001. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," NBER Chapters, in: NBER Macroeconomics Annual 2000, Volume 15, pages 339-412, National Bureau of Economic Research, Inc.
    2. Paul R. Bergin & Giancarlo Corsetti, 2020. "Beyond Competitive Devaluations: The Monetary Dimensions of Comparative Advantage," American Economic Journal: Macroeconomics, American Economic Association, vol. 12(4), pages 246-286, October.
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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:

    1. Olivier Jeanne, 2021. "Currency Wars, Trade Wars, and Global Demand," NBER Working Papers 29603, National Bureau of Economic Research, Inc.
    2. 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).
    3. 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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