Trade Costs and Inflation Dynamics

Pablo Cuba-Borda, Albert Queraltó, Ricardo Reyes-Heroles and Mikaël Scaramucci
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Albert Queraltó: https://www.federalreserve.gov/econres/albert-queralto.htm

No 2508, Working Papers from Federal Reserve Bank of Dallas

Abstract: We study how trade cost shocks influence inflation. Using bilateral trade flows from detailed global input-output data and a gravity framework, we estimate trade cost shocks and their effects on CPI inflation. Higher trade costs for final goods cause large but short-lived inflation spikes, while increased costs for intermediate inputs trigger more persistent inflation. A multi-country model of inflation with trade in final goods and intermediate inputs replicates these patterns. We show that trade cost shocks and tariffs on imported inputs transmit through global value chains and worsen monetary policy trade-offs. We use the model to quantify the effects of trade costs during the 2018–2019 U.S.–China trade war and to estimate the contribution of trade costs during the post-pandemic inflation surge. Novel data on U.S. domestic sourcing shares allow us to estimate trade cost shocks for the U.S. using Bayesian methods.

Keywords: inflation; international trade; trade costs; New Keynesian model; post-pandemic inflation; monetary policy; gravity equations (search for similar items in EconPapers)
JEL-codes: E10 E30 E50 F40 F60 (search for similar items in EconPapers)
Pages: 72
Date: 2025-03-04, Revised 2025-06-20
New Economics Papers: this item is included in nep-dge, nep-int, nep-mon and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:fip:feddwp:99656

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DOI: 10.24149/wp2508r1

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