Citation

Discussion Paper Details

Please find the details for DP14556 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

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

Author(s): Paul R Bergin and Giancarlo Corsetti

Publication Date: April 2020

Keyword(s): comparative advantage, Optimal monetary policy, production chains, tariff shock and tariff war

Programme Area(s): International Macroeconomics and Finance and Monetary Economics and Fluctuations

Abstract: In the wake of Brexit and the Trump tariff war, central banks have had to reconsider the role of monetary policy in managing the economic effects of tariff shocks, which may induce a slowdown while raising inflation. This paper studies the optimal monetary policy responses using a New Keynesian model that includes elements from the trade literature, including global value chains in production, firm dynamics, and comparative advantage between two traded sectors. We find that, in response to a symmetric tariff war, the optimal policy response is generally expansionary: central banks stabilize the output gap at the expense of further aggravating short-run inflation---contrary to the prescription of the standard Taylor rule. In response to a tariff imposed unilaterally by a trading partner, it is optimal to engineer currency depreciation up to offsetting the effects of tariffs on relative prices, without completely redressing the effects of the tariff on the broader set of macroeconomic aggregates.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=14556

Bibliographic Reference

Bergin, P and Corsetti, G. 2020. 'The Macroeconomic Stabilization of Tariff Shocks: What is the Optimal Monetary Response?'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=14556