More evidence on the effects of recent tariffs
Trump is giving economists something to write papers about: U.S. tariff rates in 2025 rose to levels not seen since the Great Depression, yet imports increased. To account for the missing trade collapse, we develop an open-economy New Keynesian model with tariff heterogeneity, inventories, and shocks to investment that capture the AI-driven boom. The model […] The post More evidence on the…
Recent tariff hikes in the United States have reached levels not experienced since the Great Depression, yet imports have continued to rise. Economists have created a model to explain this phenomenon, accounting for tariff heterogeneity, inventories, and shocks to investment, including those related to the AI-driven boom. This model accurately predicts the untargeted trends in imports, output, and inflation.
If the investment boom had not occurred, imports would have dropped by 10 percent and economic activity would have declined by 0.7 percent.
The impact of the tariffs varies depending on the type of goods being taxed. Tariffs on consumption and intermediate goods behave like supply-side shocks, while tariffs on capital goods act more like demand-side shocks. By focusing the tariff increases on consumption goods and sparing capital goods to a certain extent, the damage to output has been limited, though the inflationary effects have been enhanced.
This analysis is detailed in a new working paper by Francesco Ferrante, Andrea Prestipino, Andrea Raffo, and Michael E. Waugh, published by the National Bureau of Economic Research.
Written by urgent.news from Marginal Revolution's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
