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Tariffs and the Exchange Rate: Evidence from Twitter

Author

Listed:
  • Dmitry Matveev

    (Bank of Canada)

  • Francisco Ruge-Murcia

    (McGill University)

Abstract

This paper examines the conjecture that an increase in tariffs in a flexible exchange rate regime leads to the appreciation of the local currency. We focus on the reaction of the exchange rate market to tweets by U.S. President Donald Trump regarding possible tariff increases on Canadian and Mexican goods. The anticipation of trade restrictions leads to the appreciation of the U.S. dollar by 2.6 bps and 4.6 bps vis-à-vis the Canadian dollar and Mexican peso, respectively, within five minutes of the tweet, and the effect is statistically significant for up to 3 days after the tweet. These results suggest that the view that exchange rate appreciation may mitigate expenditure-switching toward local goods after a tariff increase is empirically plausible.

Suggested Citation

  • Dmitry Matveev & Francisco Ruge-Murcia, 2024. "Tariffs and the Exchange Rate: Evidence from Twitter," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 72(3), pages 1185-1211, September.
    • Handle: RePEc:pal:imfecr:v:72:y:2024:i:3:d:10.1057_s41308-023-00206-x
    DOI: 10.1057/s41308-023-00206-x
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    More about this item

    Keywords

    NAFTA; Commercial policy; Government communication; Expenditure-switching; High-frequency identification; Social media;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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