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Trading blows : the exchange-rate response to tariffs and retaliations
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1028-3625
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EUI; RSC; Working Paper; 2025/25; Pierre Werner Chair Programme
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OSTRY, Daniel, LLOYD, Simon, CORSETTI, Giancarlo, Trading blows : the exchange-rate response to tariffs and retaliations, EUI, RSC, Working Paper, 2025/25, Pierre Werner Chair Programme - https://hdl.handle.net/1814/92849
Abstract
This paper provides econometric evidence on the response of exchange rates and bond yields to tariff events. We construct a novel Tariff Shock Database, which captures tariff-related announcements, threats and implementations by the U.S., China, the Euro Area and other countries between 2018 and 2020, and in 2025. Our shock measure accounts for both the size of tariff rates and their macroeco- nomic relevance. We show that, in line with the predictions of recent open-macro models, exchange rates react to U.S. tariff shocks in systematically different ways depending on retaliation: the U.S. dollar (USD) depreciates if other countries re- taliate; appreciates otherwise. Comparing the evidence across the two samples, we conclude that the USD depreciation following the U.S. tariff announcement on April 2nd 2025 was consistent with models capturing tariff-shock retaliation and hence not surprising. The spike in long-maturity U.S. Treasury yields was, however, more unprecedented. Views expressed in this publication reflect the opinion of individual author(s) and not those of the European University Institute or any Institutions to which they may be affiliated.