The making of a supply shock: Tariff propagation via domestic production networks
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President Trump’s “Liberation Day” announcement triggered a discussion of whether import tariffs can reduce trade deficits or boost certain industries. This column develops a model, calibrated to the US economy, which illustrates how a uniform import tariff generates both expansionary effects upstream and contractionary effects downstream and is highly inflationary, reflecting its hybrid nature as both a positive demand shock and a negative supply shock. Policymakers seeking to stimulating
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