Global Networks, Monetary Policy and Trade

We develop a multi-country, multi-sector New Keynesian model with incomplete markets, input-output linkages, and heterogeneous sectoral price rigidities to study the macroeconomic effects of tariffs. Tariffs act simultaneously as demand and supply shocks. A risk-sharing wedge, driven by terms-of-trade effects and revalued net foreign assets, summarizes the wealth transfer in general equilibrium and determines whether the tariff-imposing country gains or loses. This wedge interacts with a propagation matrix encoding network structure, sectoral rigidity, and cross-country monetary policy heterogeneity, which governs how inherited real marginal-cost distortions feed into inflation and consumption. Through input-output linkages, transitory tariffs generate persistent distortions, unlike standard New Keynesian benchmarks. These distortions exceed what N-country monetary policy can offset, even under flexible exchange rates. Quantitatively, the 2025-2026 tariffs are stagflationary for the U.S. and yield inflation or deflation abroad depending on trade diversion and monetary policy heterogeneity. Tariff threats alone generate inflation shaped by retaliation expectations.