Tariffs have returned as instruments of economic and geopolitical policy, but their short- and medium-run macroeconomic effects are still not fully understood. This column introduces a new framework that integrates global production networks into a standard open-economy model. It shows that tariffs act simultaneously as demand and supply shocks, and their macroeconomic effects depend critically on production networks, price rigidities, and monetary policy responses at home and abroad. Once these features are incorporated, even transitory tariffs can generate persistent inflation, large output losses, and global spillovers absent retaliation.Read More
