Exchange Rates and Monetary Stabilization of Tariff Shocks

Paul Bergin and Giancarlo Corsetti

No 33845, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Home currency appreciation can neutralize the relative price distortions created by a tariff, moderating the rise in home import prices. A combination of domestic and foreign monetary policy appropriately managing the exchange rate can thus improve the trade-off between the objectives of supporting domestic demand and containing inflation. Using a New Keynesian two-country model, we analyze the role of the exchange rate in the optimal stabilization of unilateral home tariff shocks hitting, respectively, differentiated sticky-price goods and non-differentiated flexible price goods. In response to a tariff on the former, the cooperative Ramsey optimal monetary policy prescribes home appreciation, implemented mainly through a robust foreign monetary expansion. The monetary response in the home (tariff-imposing) country may be expansionary or contractionary, depending on trade elasticities, but it tends to be modest. If tariffs instead are imposed on flexible-price goods (commodities), the Ramsey optimal monetary response is the opposite, calling for a robust home monetary expansion containing home currency appreciation.

JEL-codes: E52 F42 F44 (search for similar items in EconPapers)
Date: 2025-05
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mon and nep-opm
Note: IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.nber.org/papers/w33845.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:33845

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w33845
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 ().