Optimal Monetary Policy, Tariff Shocks and Exporter Dynamics

Masashige Hamano, Francesco Pappadà and Maria Punzi ()
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Maria Punzi: Sim Kee Boon Institute, Singapore Management University

No 2309, Working Papers from Waseda University, Faculty of Political Science and Economics

Abstract: In this paper, we explore the response of optimal monetary policy to uncoordinated trade policies (foreign tariff shocks). We first provide a simple model of open economy with heterogeneous firms and derive a closed-form solution for the optimal monetary policy response to tariff shocks in presence of nominal rigidities. We show that optimal monetary policy is expansionary following foreign tariff hikes. Under nominal rigidities, uncertainty about foreign tariff hikes induces sluggish adjustments in the labor market reallocation between exporters and domestic firms, leading to an incentive for monetary authority to intervene and mitigate the impact of tariff shocks. In an extended model, we then show the response of our economy to a tariff shock under the Ramsey monetary policy, a Taylor Rule and a fixed exchange rate regime. Finally, we provide empirical evidence for the response of domestic monetary policy to foreign tariff shocks using data on Global Antidumping from the US.

Keywords: Optimal Monetary Policy; Tariff Shocks; Exporter Dynamics (search for similar items in EconPapers)
JEL-codes: E3 E6 Q54 R1 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2023-12
New Economics Papers: this item is included in nep-cba, nep-int, nep-mon, nep-opm and nep-sea
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