A New Paper Breaks the Fed’s Favorite Assumption
The Federal Reserve has a tariff problem—not with policy, but with theory. Its economists still model tariffs as if they’re automatic inflation machines : slap a duty on foreign goods, and prices go up. No nuance, no adjustment, no bargaining.
A new academic paper, published by three trade economists using microdata from China, says the Fed has it wrong. Tariffs don’t just get passed along—they get absorbed. And when the absorbing happens on the exporter’s side of the Pacific, U.S. prices don’t rise the way the Fed expects. In some cases, they may even fall.
The paper is titled “Revisiting the…
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