Masashige Hamano

 

 

Abstract:

In this paper, we explore the response of optimal monetary policy to uncoordinated trade policies, namely foreign tariff shocks. We provide a model of an open economy with heterogeneous firms and nominal rigidities where foreign tariff shocks induce a sluggish adjustment in the labor market between domestic and exporter firms, giving an incentive for the monetary authority to intervene. We find that the dispersion of firm productivity determines the degree of the monetary policy response to external tariff shocks. We corroborate our theoretical findings by providing empirical evidence on the response of domestic monetary policy to foreign tariff shocks using data on Global Antidumping from the U.S.