Tariffs, Trade Wars, and the Natural Rate of Interest

What are the effects of tariff changes and trade conflicts on the natural rate of interest? This article investigates this question, using a multicountry, heterogeneous-agent trade model in which the natural rate of interest is determined by firms’ demand for capital and households’ supply of assets through their savings behavior. We analyze how the equilibrium interest rate evolves during the transition to higher unilateral tariffs and a global trade war. In the short run, tariffs reduce capital demand, and so the natural rate of interest must fall for households’ asset supply to line up with capital demand. In the long run, both asset supply and capital demand fall by similar amounts, which leads to little change in the long-run natural rate of interest.