Macroeconomic Implications of Tariffs
Paper Session
Monday, Jan. 5, 2026 8:00 AM - 10:00 AM (EST)
- Chair: Egon Zakrajsek, Federal Reserve Bank of Boston
Making America Great Again? The Economic Impacts of Liberation Day Tariffs
Abstract
On April 2, 2025, President Trump declared “Liberation Day,” announcing broad tariffs to reduce trade deficits and revive U.S. industry. We analyze the long-term economic impacts of these tariffs through the lens of a trade model that features flexible tariff passthrough and endogenous trade deficits, calibrated to trade and income data from 194 countries. If trading partners do not retaliate, the tariffs could decrease the U.S. trade deficit and improve its terms of trade, yielding modest welfare gains when tariff revenues reduce the income tax burden for American workers. However, reciprocal retaliation results in net welfare losses for the U.S. economy. We derive the unilaterally optimal tariff within our model and show that the USTR tariffs, based on bilateral deficits, differ markedly from this theoretical benchmark. Our calibrated model implies a unilaterally optimal tariff for the U.S. of 19 percent, uniformly applied across all trading partners, and linked to the overall trade deficit rather than bilateral imbalances. Under optimal foreign retaliation to the USTR tariffs, the calibrated model predicts a decline in U.S. welfare by up to 3.8 percent when accounting for input-output linkages, and a contraction in global employment by 1.1 percent.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 recession whenever the import elasticity is below an openness-weighted average of the export elasticity and the intertemporal substitution elasticity. We argue 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 do tend to improve the trade balance, but when other countries retaliate the trade balance worsens and the recession deepens. Taking into account the recessionary effect of tariffs dramatically brings down the optimal unilateral tariff level derived in standard trade theory.Price Setting, Expectations and Tariffs
Abstract
This paper examines how realized and expected costs influence firms’ pricing during the 2025 U.S. tariff shocks. We find that price adjustments load strongly on realized costs with nearly full pass-through, while expectations play little direct role. Yet heterogeneity across firms—especially by beliefs about tariff duration—points to conditions under which expectations shape pricing. These findings provide evidence on forward-looking behavior in price-setting, with direct relevance for understanding inflation dynamics under trade policy uncertainty.JEL Classifications
- E3 - Prices, Business Fluctuations, and Cycles
- F4 - Macroeconomic Aspects of International Trade and Finance