The Macroeconomics of Tariff Shocks

Abstract

We study the short-run effects of import tariffs on GDP and the trade balance in an open-economy New Keynesian model with intermediate input trade. We find that temporary tariffs cause a downturn whenever the import elasticity is below an openness-weighted average of the export elasticity and the intertemporal substitution elasticity. We argue that this condition is likely satisfied in practice because durable goods generate great scope for intertemporal substitution, and because it is easier to lose competitiveness on the global market than to substitute between home and foreign goods. Unilateral tariffs tend to improve the trade balance, but when other countries retaliate the trade balance worsens and the contraction deepens. Taking into account the contractionary effect of tariffs dramatically lowers the optimal unilateral tariff derived in standard trade theory. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 33 citations exist upstream.

Papers that cite the same references — the relational fallback while embeddings are still backfilling.