Trade Wars, Nominal Rigidities, and Monetary Policy

Stéphane Auray, Michael Devereux and Aurélien Eyquem
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Stéphane Auray: ESC [Rennes] - ESC Rennes School of Business
Michael Devereux: Vancouver school of economics, University of British Columbia - UBC - University of British Columbia [Canada]
Aurélien Eyquem: UNIL - Université de Lausanne = University of Lausanne

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Abstract: This paper shows that the outcome of trade wars for tariffs and welfare will be affected by the monetary policy regime. The key message is that trade policy interacts with monetary policy in a way that magnifies the welfare costs of discretionary monetary policy in an international setting. If countries follow monetary policies of flexible inflation targeting, trade wars are relatively mild, with low equilibrium tariffs and small welfare costs. Discretionary monetary policies imply much higher tariffs, high inflation rates, and substantially larger welfare costs. We quantify the effects of a global trade war among major economies using estimates of trade elasticities, economic size, net foreign assets, and trade openness. We find large welfare benefits of an inflation targeting monetary policy for all countries.

Keywords: Protectionism; Trade wars; Inflation targeting; Discretionary monetary policy; Trade imbalances F30; F40; F41 (search for similar items in EconPapers)
Date: 2025-07-08
Note: View the original document on HAL open archive server: https://hal.science/hal-05151249v1
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Published in Review of Economic Studies, 2025, 92, pp.2228 - 2270. ⟨10.1093/restud/rdae075⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05151249

DOI: 10.1093/restud/rdae075

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