Year: 2025
Type: report
Abstract: We develop a multi-country, multi-sector New Keynesian model with incomplete markets, inputoutput linkages, and heterogeneous sectoral price rigidities to study the macroeconomic effects of tariffs.Tariffs act simultaneously as demand and supply shocks.A risk-sharing wedge, driven by terms-of-trade effects and revalued net foreign assets, summarizes the wealth transfer in general equilibrium and determines whether the tariff-imposing country gains or loses.This wedge interacts with a propagation matrix encoding network structure, sectoral rigidity, and cross-country monetary policy heterogeneity, which governs how inherited real marginal-cost distortions feed into inflation and consumption.Through input-output linkages, transitory tariffs generate persistent distortions, unlike standard New Keynesian benchmarks.These distortions exceed what N-country monetary policy can offset, even under flexible exchange rates.Quantitatively, the 2025-2026 tariffs are stagflationary for the U.S. and yield inflation or deflation abroad depending on trade diversion and monetary policy heterogeneity.Tariff threats alone generate inflation shaped by retaliation expectations.
DOI: 10.3386/w33686
Authors: Ṣebnem Kalemli-Özcan, Can Soylu, Muhammed Ali Yildirim
Institutions: Brown University, Harvard University
Language: English
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W4409421857