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The effects show up in the nominal exchange rate too... In our setup, tariffs raise prices and depreciate the currency. This echoes recent empirical patterns during trade tensions. (capital flight is surely another reason, but basic macro+trade can already explain it)

The results hold with sticky wages, but then inflation control is even costlier. Zero inflation now requires deeper recessions and wage deflation. The optimal policy is still to accommodate—with some inflation.

Basically, you can do open economy macro with your closed economy model. Here are some numerical examples run thro the model...

Technically, our AS IF result is as follows. -an extra "cost push" epsilon term in the Phillips curve, so it is pushes the curve out. - the welfare objective is unchanged: dual mandate penalizing inflation and output deviations. 7/N

It looks something like this using a basic microeconomic intuition. The economy frontier goes down, but also wages are not equal to actual productivity, they are lower, so labor is distorted down. The second effect is stronger starting from free trade.

What should the Fed do with Trump Tariffs? New paper on 'Monetary Policy in Times of Tariffs' with Guido Lorenzoni & Veronica Guerrieri (link at end) We show simplest most intuitive way to approach tariffs is actually correct: Tariffs = textbook cost-push shock www.nber.org/papers/w33772 🧵1/N

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This hints at a more general result, when the Engel curve slope is higher today (more M at margin) than tomorrow, a permanent tariff reduces the trade deficit. This happens most naturally if the Engel curve is convex. Intuition?... 9/n

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The conditions are rather stringent though, we show that if tariffs are large enough, trade collapses and so does the trade deficit, hence (with NFA=0; otherwise you may get surplus!). 8/nhttps://pbs.twimg.com/media/GofurgVW8AEGqMx?format=png&name=medium

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... using a utility U(M,X) over aggregates for imports and exports. In other words, it is AS IF it were a simple two good economy, with imports and exports. Our results use this induced preference relation and especially its Engel curves. 6/n

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Ivan Werning @ivanwerning.bsky.social · 03/04/2025

How Tariffs Affect Trade Deficits... ... a new paper with amazing trade economist Arnaud Costinot. Many politicians and the general public expect tariffs to reduce imports lower imports and thus work to close a trade deficit. Economists typically say "not so fast"... 🧵1/n

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Analyzing theoretical formula used to determine tariffs… What’s wrong with it? Used in isolation on a single small trading partner the formula makes some sense. But if applied widely to many non trivial ones it does not. ustr.gov/issue-areas/...

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Ivan Werning @ivanwerning.bsky.social · 14/01/2025

Economics is hard. Even the basics. Exhibit #52783

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Ivan Werning @ivanwerning.bsky.social · 02/01/2025

Trump at it again talking about the virtues of tariffs. Two key papers: Diamond-Mirrlees Atkinson-Stiglitz, establish conditions under which tariffs should not be employed and show the income tax is a great tax. Or read @pkrugman.bsky.social Pop internationalism!

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Ivan Werning @ivanwerning.bsky.social · 19/12/2024

Argentina, one year into its libertarian presidency Milei is starting to post some good numbers. Fiscal cut of ~5% of GDP. Inflation continues to fall. Structural reforms and deregulations Recession ending. Latest: poverty falls after spike earlier this year.

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Ivan Werning @ivanwerning.bsky.social · 12/12/2024

Tom Sargent honoris causa at di Tella University in Buenos Aires.

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Ivan Werning @ivanwerning.bsky.social · 26/11/2024

Fake Barbara… check the handle

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Ivan Werning @ivanwerning.bsky.social · 23/11/2024

I wrote this to think through a more general case (fun!). Seems to justify clustering (we treat each treated group as a single observation with its average).

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Ivan Werning @ivanwerning.bsky.social · 21/11/2024

A great party at MIT to not forget… Celebrating Daron Acemoglu and his Nobel award! Happy new in the room was brimming.

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Ivan Werning @ivanwerning.bsky.social · 15/11/2024

On Fiscal Dominance, a classic is Sargent-Wallace "Unpleasant Monetarist Arithmetic" in the QR. 💵 In this QR note I celebrate and revisit it. I show their spectacular example relies on being on the wrong side of a Laffer curve. I offer a variant that strengthens their conclusions. t.co/gGRDafQ01V

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Ivan Werning @ivanwerning.bsky.social · 19/11/2023

Ran this on the other site (we still can't do it here):

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Ivan Werning @ivanwerning.bsky.social · 18/10/2023

This paper provides a simple formula that automates going from... Empirical estimates of wage distribution impacts ---> Desired tax on new technology Sorry, but now that that has been automated, we no longer need economists for this anymore! :) economics.mit.edu/sites/defaul...

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Ivan Werning @ivanwerning.bsky.social · 17/10/2023

Inflation dares not enter here at the ECB Frankfurt's café. Great prices!

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Ivan Werning @ivanwerning.bsky.social · 14/10/2023

Announcing dollarization—hoping to lower inflation—may lead to more inflation! Yep, title+abstract upside down! Context: Argentina is actually seriously debating adopting the dollar, giving up the peso and monetary policy. But it has very few dollars now so... nber.org/papers/w31763

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Oops... here is the PDF instead www.dropbox.com/scl/fi/i7gm9... #EconSky 📉📈

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Hack: add #EconSky 📉📈 very quickly Easy! Use automatic text replacement/substitution! On a Mac, go to Settings > Keyboard > Text Replacement > add your substitution (see screenshot)

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Just back from giving a talk to 2nd year students on how to approach research, how to write a paper. Abhijit was coming after me (good thing he didn't go first, tough act to follow!) Here are my slides... www.dropbox.com/scl/fi/0pm2m...

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Ivan Werning @ivanwerning.bsky.social · 04/10/2023

This NY Fed measure of underlying inflation makes for beautiful figures and shows a recent sharper decline that standard other measures. I need to re-read the methodology, but anyone have views on its justification as a better metric? What's the idea? www.newyorkfed.org/research/pol...

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At MIT I just gave the internal faculty seminar, a cool relatively recent invention. Who else has this? I prepared a talk on inflation, pooling papers I have worked on (with awesome coauthors). Tried to keep it somewhat accessible for the non-macro audience. Slides: www.dropbox.com/scl/fi/4kuzj...

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Ivan Werning @ivanwerning.bsky.social · 28/09/2023

Wage-Price Spirals 🌀 What explains recent inflation? What to expect going forward? Is rising wages a concern for inflation? This Friday 10am at this Brookings conference. Paper... www.brookings.edu/wp-content/u... Live stream available and rest of a great program... t.co/y1oWJMGy81

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Ivan Werning @ivanwerning.bsky.social · 11/05/2023

Another life hack when you are on the road and your shoes get wet… hotel blow dryer finally comes in handy! Cc @bengolub.bsky.social

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Ivan Werning @ivanwerning.bsky.social · 11/05/2023

Nerd challenge: what equations are these? For what field?