The macroeconomic stabilization of tariff shocks: What is the optimal monetary response?

Paul R. Bergin and Giancarlo Corsetti

Journal of International Economics, 2023, vol. 143, issue C

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.

Keywords: Tariff shock; Tariff war; Optimal monetary policy; Production chains (search for similar items in EconPapers)
JEL-codes: E52 F42 F44 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:143:y:2023:i:c:s0022199623000442

DOI: 10.1016/j.jinteco.2023.103758

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