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US trade policy and the US dollar

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  • Khalil, Makram
  • Strobel, Felix

Abstract

We show that the US dollar response to trade policy uncertainty (TPU) is key to assessing the impact of US trade policy. Employing structural vector autoregressive models, we find that TPU shocks supported a multilateral USD appreciation during the 2018–19 trade tensions between the US and some of its major trading partners. We rationalize this in a two-country New Keynesian model with financial frictions that links the increase in TPU to rising demand for safe USD assets. Our findings suggest that the TPU-induced appreciation of the USD in 2018–19 significantly counteracted US trade policy attempts to raise US competitiveness.

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  • Khalil, Makram & Strobel, Felix, 2024. "US trade policy and the US dollar," Journal of International Economics, Elsevier, vol. 151(C).
    • Handle: RePEc:eee:inecon:v:151:y:2024:i:c:s0022199624000977
    DOI: 10.1016/j.jinteco.2024.103970
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    2. Khalil, Makram & Weber, Marc-Daniel, 2021. "Chinese supply chain shocks," MPRA Paper 110356, University Library of Munich, Germany.

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    More about this item

    Keywords

    Trade policy uncertainty; Safe asset currency; Two-country model with financial frictions;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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