Global Networks, Monetary Policy and Trade

Sebnem Kalemli-Ozcan, Can Soylu and Muhammed A. Yildirim

No 33686, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop a multi-country, multi-sector New Keynesian model with incomplete markets, input-output linkages, and heterogeneous sectoral price rigidities to study the macroeconomic effects of tariffs. Tariffs act simultaneously as demand and supply shocks. A risk-sharing wedge, driven by terms-of-trade effects and revalued net foreign assets, summarizes the wealth transfer in general equilibrium and determines whether the tariff-imposing country gains or loses. This wedge interacts with a propagation matrix encoding network structure, sectoral rigidity, and cross-country monetary policy heterogeneity, which governs how inherited real marginal-cost distortions feed into inflation and consumption. Through input-output linkages, transitory tariffs generate persistent distortions, unlike standard New Keynesian benchmarks. These distortions exceed what N-country monetary policy can offset, even under flexible exchange rates. Quantitatively, the 2025-2026 tariffs are stagflationary for the U.S. and yield inflation or deflation abroad depending on trade diversion and monetary policy heterogeneity. Tariff threats alone generate inflation shaped by retaliation expectations.

JEL-codes: E0 F40 (search for similar items in EconPapers)
Date: 2025-04
New Economics Papers: this item is included in nep-cba, nep-dge, nep-int, nep-mon, nep-net and nep-opm
Note: EFG IFM ITI ME
References: Add references at CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://www.nber.org/papers/w33686.pdf (application/pdf)
Access to the full text is generally limited to series subscribers, however if the top level domain of the client browser is in a developing country or transition economy free access is provided. More information about subscriptions and free access is available at http://www.nber.org/wwphelp.html. Free access is also available to older working papers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:33686

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w33686
The price is Paper copy available by mail.

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().