A new working paper written by two researchers at the Federal Reserve Bank of San Francisco’s Economic Research Department argues that tariffs can lead to lower inflation, albeit with the consequence of higher unemployment.

The authors, Régis Barnichon and Aayush Singh, examined tariff policies in the U.S. since 1870 and came to this conclusion: “higher tariffs lead to lower economic activity and lower inflation in the short-run.”

Standard arguments have said that CPI inflation increases in response to tariffs, but Barnichon and Singh’s analysis comes to a different assessment. “Instead, tariff shocks appear to act as aggregate demand shocks — moving inflation and unemployment in the same directions. A possible explanation relies on the effects of uncertainty: a tariff shock creates (or coincides with) an uncertain economic environment, which by itself depresses economic activity by lowering consumers’ and investors’ confidence and puts downward pressures on inflation….”

“Another possible channel is a wealth channel, whereby an adverse tariff shock leads to a drop in asset prices, which then depresses aggregate demand and leads to higher unemployment and lower inflation,” they added. “We find evidence in support of both channels: in response to higher tariffs, stock prices decline and stock market volatility increases.”

Read the article.