Trade Policy Uncertainty, Financial Frictions, and Monetary Policy

Jingjing Fan (), Feng Shi (), Junzhu Zhao () and Jingming Zhu ()
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Jingjing Fan: China Economics and Management Academy, Central University of Finance and Economics
Feng Shi: Business School, Beijing Language and Cultural University
Junzhu Zhao: China Economics and Management Academy, Central University of Finance and Economics
Jingming Zhu: China Economics and Management Academy, Central University of Finance and Economics

Annals of Economics and Finance, 2023, vol. 24, issue 1, 193-211

Abstract: This paper introduces the foreign tariff uncertainty shock in a small open economy model with financial frictions to examine the fluctuations in the main macroeconomic variables and then analyzes which type of monetary policy performs better in terms of stabilizing the macroeconomic variables. We find that a rise in the foreign tariff uncertainty shock leads to a sizable decline in the main macroeconomic variables except for CPI inflation. In addition, the amplification effect of financial frictions aggravates the volatility in the main macroeconomic variables.The CPI inflation targeting rule performs better than the PPI inflation targeting rule in the sense that the former can stabilize the economy better than the latter following the foreign tariff uncertainty shock.

Keywords: Foreign tariff uncertainty shock; Financial frictions; Inflation targeting (search for similar items in EconPapers)
JEL-codes: E5 F3 F4 (search for similar items in EconPapers)
Date: 2023
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