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The Optimal Monetary Policy Response to Tariffs

Author

Listed:
  • Javier Bianchi
  • Louphou Coulibaly

Abstract

What is the optimal monetary policy response to tariffs? This paper explores this question within an open-economy New Keynesian model, characterizes the macroeconomic effects of tariffs, and shows that the optimal monetary policy response is expansionary, with inflation rising above and beyond the direct effects of tariffs. This result holds regardless of whether tariffs apply to consumption goods or intermediate inputs, whether the shock is temporary or permanent, and whether terms of trade are exogenous or endogenous. When tariffs address other distortions, monetary policy remains expansionary, but the inflationary effects are mitigated.

Suggested Citation

  • Javier Bianchi & Louphou Coulibaly, 2025. "The Optimal Monetary Policy Response to Tariffs," NBER Working Papers 33560, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:33560
    Note: EFG IFM ITI ME
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    Cited by:

    1. Anantha Divakaruni & Peter Zimmerman, 2025. "Tariffs, Stablecoins, and the Demand for Dollars," Working Papers 25-21, Federal Reserve Bank of Cleveland.
    2. Marcos Mac Mullen & Soo Kyung Woo, 2025. "Real Exchange Rate and Net Trade Dynamics: Financial and Trade Shocks," International Finance Discussion Papers 1419, Board of Governors of the Federal Reserve System (U.S.).
    3. Paul Bergin & Giancarlo Corsetti, 2025. "Exchange Rates and Monetary Stabilization of Tariff Shocks," NBER Working Papers 33845, National Bureau of Economic Research, Inc.
    4. Jouvanceau, Valentin & Darracq Pariès, Matthieu & Dieppe, Alistair & Kockerols, Thore, 2025. "Trade wars and global spillovers. A quantitative assessment with ECB-global," Working Paper Series 3117, European Central Bank.
    5. repec:onb:oenbbu:y:2026:i:q4/25-4:b:4 is not listed on IDEAS
    6. Mac Mullen, Marcos & Woo, Soo Kyung, 2025. "Real exchange rate and net trade dynamics: Financial and trade shocks," Journal of International Economics, Elsevier, vol. 157(C).
    7. Rubén Domínguez-Díaz & Marta Domínguez-Jiménez & José-Elías Gallegos & Javier Quintana, 2026. "Tariffs as Taxes on Capital," Working Papers wp2026_2610, CEMFI.
    8. Ambrosino, Ludovica & Chan, Jenny & Tenreyro, Silvana, 2026. "Trade fragmentation, inflationary pressures and monetary policy," LSE Research Online Documents on Economics 130958, London School of Economics and Political Science, LSE Library.
    9. Anna Bartocci & Alessandro Cantelmo & Pietro Cova & Alessandro Notarpietro & Massimiliano Pisani, 2025. "The macroeconomic effects of import tariffs on the euro area: a model-based assessment," Questioni di Economia e Finanza (Occasional Papers) 960, Bank of Italy, Economic Research and International Relations Area.
    10. Ignatenko, Anna & Lashkaripour, Ahmad & Macedoni, Luca & Simonovska, Ina, 2025. "Making America great again? The economic impacts of Liberation Day tariffs," Journal of International Economics, Elsevier, vol. 157(C).
    11. Wolfgang Lechthaler & Mariya Mileva, 2026. "The price of division: sticky prices and monetary policy in a fragmenting world (Q4/25)," OeNB Bulletin, Oesterreichische Nationalbank (Austrian Central Bank), issue Q4/25-4, pages 1-34.
    12. Luca Fornaro & Martin Wolf, 2025. "Tariffs and technological hegemony," Economics Working Papers 1925, Department of Economics and Business, Universitat Pompeu Fabra, revised Jan 2026.
    13. Moro, Alessandro & Nispi Landi, Valerio, 2026. "FraNK: Fragmentation in the NK Model," Journal of Monetary Economics, Elsevier, vol. 159(C).
    14. Eduardo Dávila & Andrés Rodríguez-Clare & Andreas Schaab & Stacy Tan, 2025. "A Dynamic Theory of Optimal Tariffs," NBER Working Papers 33898, National Bureau of Economic Research, Inc.
    15. Wolfgang Lechthaler & Mariya Mileva, 2025. "The price of division: sticky prices and monetary policy in a fragmenting world (Q4/25)," OeNB Bulletin, Oesterreichische Nationalbank (Austrian Central Bank), issue Q4/25-4, pages 1-34.
    16. Antonova, Anastasiia & Huxel, Luis & Matvieiev, Mykhailo & Müller, Gernot, 2025. "The Propagation of Tariff Shocks via Production Networks," CEPR Discussion Papers 20305, Centre for Economic Policy Research.
    17. Darracq Pariès, Matthieu & Jouvanceau, Valentin & Eyquem, Aurélien, 2026. "The third-country effects of trade wars," Working Paper Series 3213, European Central Bank.
    18. Drechsel, Thomas & McLeay, Michael & Tenreyro, Silvana & Turri, Enrico, 2026. "Optimal monetary and exchange rate frameworks for commodity-exposed economies," LSE Research Online Documents on Economics 140771, London School of Economics and Political Science, LSE Library.

    More about this item

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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