The Macroeconomic Transmission of Import Tariff Shocks: A Time Series Analysis of the Modern U.S. Trade Era

Abstract

This paper examines the aggregate macroeconomic effects of import tariff shocks in the United States using monthly and quarterly time-series data from 1990 to 2024. The sample spans the modern trade liberalization era while incorporating the protectionist shift of 2018. The applied tariff rate serves as the primary shock variable, with the Trade Restrictiveness Index serving as a robustness check. This study employs various econometric techniques, namely, vector autoregressions, a vector autoregression model with imposed tariff exogeneity, and local projection methods. These models are used to estimate the dynamic responses of inflation, output, employment, and monetary policy to a one-standard-deviation tariff shock. The 2018 trade policy shift is examined directly through a local projection interaction term specification. The results consistently indicate that tariff shocks produce transitory effects on output and employment that dissipate within a few months. Consumer price pass-through remains statistically insignificant across all specifications. The federal funds rate shows no systematic response in the baseline VAR, though the VARX specification suggests a modest and persistent monetary tightening when strict exogeneity is imposed. Overall, the findings suggest that tariff shocks are not a primary driver of U.S. business cycle fluctuations in the modern trade environment.