The Macroeconomic Stabilization of Tariff Shocks: What is the Optimal Monetary Response?
Paul Bergin and
Giancarlo Corsetti ()
No 26995, NBER Working Papers from National Bureau of Economic Research, Inc
In the wake of Brexit and the Trump tariff war, and a general weakening of the political support for free trade, central banks have been faced with the need to reconsider the role of monetary policy in managing the economic effects of unexpected hikes in tariffs and trade costs. Although tariffs induce a slowdown with rising inflation like supply shocks, their distortionary effects on production and relative prices distinguish them from standard supply disturbances, and thus motivate a different monetary response. This paper studies the optimal monetary stabilization of tariff shocks using a New Keynesian model enriched with elements from the trade literature, including global value chains in production, firm dynamics, and comparative advantage between traded sectors. We find that, in response to tariff shocks, the optimal monetary stance is generally expansionary: central banks support activity at the expense of further aggravating short-run inflation—contrary to the prescription of the standard Taylor rule. If the tariff is imposed unilaterally by a trading partner, currency depreciation partly offsets the effects of tariffs on relative prices, without completely redressing the effects of the tariff on the broader set of macroeconomic aggregates. Remarkably, the country issuing a dominant currency can shelter its economy from the adverse effects of a selective tariff war on comparative advantage.
JEL-codes: F4 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-int, nep-mac and nep-mon
Note: IFM ITI
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed
Downloads: (external link)
Working Paper: The Macroeconomic Stabilization Of Tariff Shocks: What Is The Optimal Monetary Response? (2020)
Working Paper: The Macroeconomic Stabilization of Tariff Shocks: What is the Optimal Monetary Response? (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:26995
Ordering information: This working paper can be ordered from
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 ().