When Tariffs Meet Oil: Optimal Monetary Policy with Household Debt
Published:
How should a commodity exporter set monetary policy when foreign tariffs and oil prices rise together, and who bears the adjustment? I study this question in a small open economy with nominal household debt, housing collateral, and gradual mortgage repricing, calibrated to Canadian data. Under a CPI rule, the policy rate rises and borrowers absorb most of the contraction: their consumption falls by 1.1 percent on impact, against 0.25 percent for savers. The Ramsey allocation cuts the rate by 14 basis points, roughly halves the output decline, and keeps borrower consumption at its no-shock level on impact, at the cost of higher consumer price inflation. The policy choice is mainly redistributive: relative to the CPI rule, borrowers gain the equivalent of 0.11 percent of permanent consumption, savers lose 0.02 percent, and the aggregate gain is negligible. Faster mortgage repricing lets a smaller rate cut deliver larger immediate relief to indebted households.