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The macroeconomic stabilization of tariff shocks: What is the optimal monetary response?

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  • Bergin, Paul R.
  • Corsetti, Giancarlo

Abstract

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

Suggested Citation

  • Bergin, Paul R. & Corsetti, Giancarlo, 2023. "The macroeconomic stabilization of tariff shocks: What is the optimal monetary response?," Journal of International Economics, Elsevier, vol. 143(C).
    • Handle: RePEc:eee:inecon:v:143:y:2023:i:c:s0022199623000442
    DOI: 10.1016/j.jinteco.2023.103758
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    More about this item

    Keywords

    Tariff shock; Tariff war; Optimal monetary policy; Production chains;
    All these keywords.

    JEL classification:

    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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