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Optimal Monetary Policy, Tariff Shocks and Exporter Dynamics

Author

Listed:
  • Masashige Hamano

    (Waseda University)

  • Francesco Pappadà

    (Ca’ Foscari University of Venice and Paris School of Economics)

  • Maria Teresa Punzi

    (Sim Kee Boon Institute, Singapore Management University)

Abstract
In this paper, we explore the response of optimal monetary policy to uncoordinated trade policies (foreign tariff shocks). We first provide a simple model of open economy with heterogeneous firms and derive a closed-form solution for the optimal monetary policy response to tariff shocks in presence of nominal rigidities. We show that optimal monetary policy is expansionary following foreign tariff hikes. Under nominal rigidities, uncertainty about foreign tariff hikes induces sluggish adjustments in the labor market reallocation between exporters and domestic firms, leading to an incentive for monetary authority to intervene and mitigate the impact of tariff shocks. In an extended model, we then show the response of our economy to a tariff shock under the Ramsey monetary policy, a Taylor Rule and a fixed exchange rate regime. Finally, we provide empirical evidence for the response of domestic monetary policy to foreign tariff shocks using data on Global Antidumping from the US.

Suggested Citation

  • Masashige Hamano & Francesco Pappadà & Maria Teresa Punzi, 2023. "Optimal Monetary Policy, Tariff Shocks and Exporter Dynamics," Working Papers 2309, Waseda University, Faculty of Political Science and Economics.
    • Handle: RePEc:wap:wpaper:2309
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Optimal Monetary Policy; Tariff Shocks; Exporter Dynamics;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • R1 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics

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