Tariffs, Trade Wars, and the Natural Rate of Interest

Neil Mehrotra and Michael Waugh

No 34206, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: What are the effects of tariff changes and trade conflicts on the natural rate of interest? This article investigates this question, using a multicountry, heterogeneous-agent trade model in which the natural rate of interest is determined by firms’ demand for capital and households’ supply of assets through their savings behavior. We analyze how the equilibrium interest rate evolves during the transition to higher unilateral tariffs and a global trade war. In the short run, tariffs reduce capital demand, and so the natural rate of interest must fall for households’ asset supply to line up with capital demand. In the long run, both asset supply and capital demand fall by similar amounts, which leads to little change in the long-run natural rate of interest.

JEL-codes: E0 E40 F0 F10 F40 (search for similar items in EconPapers)
Date: 2025-09
New Economics Papers: this item is included in nep-fdg and nep-ifn
Note: EFG IFM ITI ME
References: Add references at CitEc
Citations:

Published as Neil R. Mehrotra & Michael E. Waugh, 2025. "Tariffs, Trade Wars, and the Natural Rate of Interest," Quarterly Review, vol 45(2).

Downloads: (external link)
http://www.nber.org/papers/w34206.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:34206

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w34206
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 ().