The Macroeconomic Stabilization Of Tariff Shocks: What Is The Optimal Monetary Response?
Bergin, P. R.
Cambridge Working Papers in Economics
Cambridge-INET Working Paper Series
Faculty of Economics, University of Cambridge
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Bergin, P. R., & Corsetti, G. (2020). The Macroeconomic Stabilization Of Tariff Shocks: What Is The Optimal Monetary Response?. https://doi.org/10.17863/CAM.82493
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 elements from the trade literature, including global value chains, firm dynamics, and comparative advantage, 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.
tariff shock, tariff war, optimal monetary policy, comparative advantage, production chains
This record's DOI: https://doi.org/10.17863/CAM.82493
This record's URL: https://www.repository.cam.ac.uk/handle/1810/335054
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