òòò½Íø Papers and Proceedings
ISSN 2574-0768 (Print) | ISSN 2574-0776 (Online)
Global Trade, Tariff Uncertainty, and the US Dollar
òòò½Íø Papers and Proceedings
(pp. 47–52)
Abstract
We analyze how tariff uncertainty affects exchange rates, motivated by the US dollar’s depreciation after the 2025 tariff announcements. Standard macrotrade models predict that unilateral tariffs appreciate the implementing country’s currency, but we show this result can be overturned by policy uncertainty. We build a two-country general equilibrium model with risk-averse agents and segmented financial markets, where tariff volatility enters uncovered interest parity through a risk-premium wedge. Higher tariff uncertainty increases precautionary savings and risk premia, leading to immediate currency depreciation even as tariffs rise. Quantitatively, the model replicates the size and timing of the observed dollar depreciation episode dynamics.Citation
Kalemli-Özcan, Åžebnem, Can Soylu, and Muhammed A. Yıldırım. 2026. "Global Trade, Tariff Uncertainty, and the US Dollar." òòò½Íø Papers and Proceedings 116: 47–52. DOI: 10.1257/pandp.20261039Additional Materials
JEL Classification
- E44 Financial Markets and the Macroeconomy
- F13 Trade Policy; International Trade Organizations
- F14 Empirical Studies of Trade
- F31 Foreign Exchange