International Finance Discussion Papers (IFDP)
July 2025
Trade Costs and Inflation Dynamics
Pablo Cuba-Borda, Albert Queralto, Ricardo Reyes-Heroles, and Mikaël Scaramucci
Abstract:
We study how trade cost shocks influence inflation. Using bilateral trade flows from detailed global input-output data and a gravity framework, we estimate trade cost shocks and their effects on CPI inflation. Higher trade costs for final goods cause large but short-lived inflation spikes, while increased costs for intermediate inputs trigger more persistent inflation. A multi-country model of inflation with trade in final goods and intermediate inputs replicates these patterns. We show that trade cost shocks and tariffs on imported inputs transmit through global value chains and worsen monetary policy trade-offs. We use the model to quantify the effects of trade costs during the 2018–2019 U.S.-China trade war and to estimate the contribution of trade costs during the post-pandemic inflation surge. Novel data on U.S. domestic sourcing shores allow us to estimate trade cost shocks for the U.S. using Bayesian methods.
Keywords: Inflation, international trade, trade costs, New Keynesian model, post-pandemic inflation, monetary policy, gravity equations
DOI: https://doi.org/10.17016/IFDP.2025.1411
PDF: Full Paper
Disclaimer: The economic research that is linked from this page represents the views of the authors and does not indicate concurrence either by other members of the Board's staff or by the Board of Governors. The economic research and their conclusions are often preliminary and are circulated to stimulate discussion and critical comment. The Board values having a staff that conducts research on a wide range of economic topics and that explores a diverse array of perspectives on those topics. The resulting conversations in academia, the economic policy community, and the broader public are important to sharpening our collective thinking.