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Tariffs as Taxes on Capital

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Abstract

This paper explores the macroeconomic consequences of levying tariffs on imported investment goods, which directly affect the household’s investment Euler equation. First, we construct a new multi-country and multi-sector investment input-output matrix to trace investment goods through international production chains. Second, we embed this in an open-economy New Keynesian model with production networks. In a uniform US tariff experiment, this channel more than doubles the impact contraction in GDP, with investment-goods exposure as the best predictor of aggregate output losses. Holding the average tariff fixed, redesigning its composition to avoid the investment network cuts cumulative domestic output losses by two-thirds.

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  • Rubén Domínguez-Díaz & Marta Domínguez-Jiménez & José-Elías Gallegos & Javier Quintana, 2026. "Tariffs as Taxes on Capital," Working Papers wp2026_2610, CEMFI.
    • Handle: RePEc:cmf:wpaper:wp2026_2610
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    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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