Title page 1

Contents 1

Abstract 2

Non-technical summary 3

1. Introduction 5

2. A Simplified Example 7

2.1. The Example Model 8

2.1.1. Households 8

2.1.2. Firms 9

2.1.3. Government 11

2.1.4. Monetary Policy 11

2.1.5. Equilibrium 11

2.2. The Impact of Tariffs 12

3. The Full Model 15

3.1. Household 15

3.2. Labour Unions 18

3.3. Firms 19

3.3.1. Domestic Retailers 19

3.3.2. International Retailers 21

3.3.3. Producers 23

3.4. Monetary Policy 24

3.5. Market clearing 25

4. Quantitative Analysis 26

4.1. Calibration 26

4.2. Results 29

4.2.1. Impact of Import Tariffs 29

4.2.2. Export Tariffs and Import Retaliation 30

5. Conclusions 31

References 34

Acknowledgements 37

Tables 27

Table 1. Calibration 27

Figures 12

Figure 1. Summary of the simplified model 12

Figure 2. Impact of import tariffs 14

Figure 3. Impact of import tariffs in the full model 29

Figure 4. Decomposition of the effect of import tariffs on domestic CPI inflation 30

Figure 5. Impact of export tariffs and alternative retaliatory measures 32