Abstract:
This paper analyses tariffs as a tool of fiscal policy. Based on a VAR analysis using US time-series data, we find that a recursively identified tariff shock is deflationary and contractionary. We rationalize these findings in an Open Economy New Keynesian model augmented with a detailed fiscal sector and find that outcomes depend on the fiscal-monetary regime: tariffs are deflationary under active fiscal/passive monetary policy, but effects reverse if revenues fund transfers or tax cuts.
