New research out this week from the San Francisco Fed by Barnichon and Singh.
What is a Tariff Shock? Insights from 150 Years of Tariff Policy
Conclusion
In this paper we exploit 150 years of tariff policy in the US and abroad to estimate the short-run effects of tariff shocks on macro aggregates. A careful review of the major changes in US tariff policy since 1870 shows no systematic relation between the state of the cycle and the direction of the tariff changes, as partisan differences on the effects and desirability of tariffs led to opposite policy responses to similar economic conditions.
Exploiting this quasi-random nature of tariff variations, we find that a tariff hike raises unemployment (lowers economic activity) and lowers CPI inflation. Using only tariff changes driven by long-run considerations—a traditional narrative identification—gives similar results. We also obtain similar results if we restrict the sample to the modern post World War II period or if we use independent variation from other countries (France and the UK).
The inflation response goes against the predictions of standard models, whereby CPI inflation should go up in response to higher tariffs. We provide suggestive evidence that an aggregate demand channel can be at play, but an important avenue for future research is to understand the theoretical reasons for these surprising yet robust findings, which are central to the appropriate monetary response to tariff shocks.
DB2