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The Macroeconomic Stabilization of Tariff Shocks: What is the Optimal Monetary Response?

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  • Paul R. Bergin
  • Giancarlo Corsetti

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 global value chains and firm dynamics, 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.

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  • Paul R. Bergin & Giancarlo Corsetti, 2020. "The Macroeconomic Stabilization of Tariff Shocks: What is the Optimal Monetary Response?," NBER Working Papers 26995, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:26995
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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. 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).
    4. 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.
    5. 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.
    6. Hernández Vega Marco A., 2021. "Tariffs and Macroeconomic Dynamics," Working Papers 2021-25, Banco de México.

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