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The Optimal Monetary Policy Response to Tariffs

Author

Listed:
  • Javier Bianchi
  • Louphou Coulibaly

Abstract

What is the optimal monetary policy response to tariffs? This paper explores this question within an open-economy New Keynesian model and shows that the optimal monetary policy response is expansionary, with inflation rising above and beyond the direct effects of tariffs. This result holds regardless of whether tariffs apply to consumption goods or intermediate inputs, whether the shock is temporary or permanent, and whether tariffs address other distortions.

Suggested Citation

  • Javier Bianchi & Louphou Coulibaly, 2025. "The Optimal Monetary Policy Response to Tariffs," Working Papers 810, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmwp:99705
    DOI: 10.21034/wp.810
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    More about this item

    Keywords

    Tariffs; Inflation; Optimal monetary policy;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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