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

Paul Bergin and Giancarlo Corsetti

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

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.

Keywords: comparative advantage; optimal monetary policy; production chains; tariff shock; tariff war (search for similar items in EconPapers)
JEL-codes: F40 (search for similar items in EconPapers)
Date: 2020-04-06
New Economics Papers: this item is included in nep-cba, nep-dge, nep-int and nep-mac
Note: gc422
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Citations: View citations in EconPapers (6)

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Related works:
Working Paper: The Macroeconomic Stabilization of Tariff Shocks: What is the Optimal Monetary Response? (2023)
Working Paper: The Macroeconomic Stabilization of Tariff Shocks: What is the Optimal Monetary Response? (2020)
Working Paper: The Macroeconomic Stabilization of Tariff Shocks: What is the Optimal Monetary Response? (2020)
Working Paper: The Macroeconomic Stabilization of Tariff Shocks: What is the Optimal Monetary Response? (2020)
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