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Tariffs and the Exchange Rate: Evidence from Twitter

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  • Dmitry Matveev
  • Francisco Ruge-Murcia

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 U.S. dollar appreciating by 0.023% and 0.051% vis-à-vis the Canadian dollar and Mexican peso within five minutes of the tweet, and comparable percentages for forward rates up to five years ahead. Exchange rate appreciation may mitigate the expenditure-switching intended by the protectionist policy.

Suggested Citation

  • Dmitry Matveev & Francisco Ruge-Murcia, 2021. "Tariffs and the Exchange Rate: Evidence from Twitter," Staff Working Papers 21-36, Bank of Canada.
  • Handle: RePEc:bca:bocawp:21-36
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    References listed on IDEAS

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    1. Jeanne, Olivier & Son, Jeongwon, 2012. "To what extent are tariffs offset by exchange rates?," Economics Working Paper Archive 66656, The Johns Hopkins University,Department of Economics.

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    More about this item

    Keywords

    Exchange rates; Trade integration;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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