The Macroeconomic Stabilization of Tariff Shocks: What is the Optimal Monetary Response?

Giancarlo Corsetti and Paul Bergin

No 2023/17, RSCAS Working Papers from European University Institute

Abstract: In the wake of Brexit and Trump trade war, central banks face the need to reconsider the role ofmonetary policy in managing the inflationary-recessionary effects of hikes in tariffs. Using a NewKeynesian model enriched with global value chains and firm dynamics, we show that the optimalmonetary response is expansionary. It supports activity and producer prices at the expense ofaggravating short-run headline inflation---contrary to the prescription of the standard Taylor rule. Thisholds all the more when the home currency is dominant in pricing of international trade.

Keywords: Tariff shock; tariff war; optimal monetary policy; production chains (search for similar items in EconPapers)
Date: 2023-03
New Economics Papers: this item is included in nep-cba, nep-dge, nep-int, nep-mon and nep-opm
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Citations: View citations in EconPapers (5)

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Related works:
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)
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)
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