Optimal monetary policy, tariff shocks and exporter dynamics (with Masashige Hamano and Maria Teresa Punzi)

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. In an extended model, we then show the quantitative response of our economy to a tariff shock under the Ramsey monetary policy, a Taylor Rule and a fixed vs flexible 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.