The Optimal Monetary Policy Response to Tariffs

Abstract

What is the optimal monetary policy response to tariffs? This paper explores this question within an open-economy New Keynesian model and shows that the optimal monetary policy response is expansionary, with inflation rising above and beyond the direct effects of tariffs. This result holds regardless of whether tariffs apply to consumption goods or intermediate inputs, whether the shock is temporary or permanent, and whether tariffs address other distortions.

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