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The Pass-through of Tariffs and Exchange Rates

Author

Listed:
  • Stéphane Auray
  • Michael B. Devereux
  • Aurélien Eyquem

Abstract

This paper shows that the currency in which traded goods are invoiced has a first-order implication for the short-run impact of tariffs on the economy. If prices are set in terms of producer’s currency (PCP), a unilateral tariff is contractionary on impact, reducing GDP, and causing a deterioration in the trade balance. By contrast, with prices pre-set in buyers currency (LCP), the same tariff shock is expansionary, and improves the trade balance. The key difference between the two regimes lies in the differential exchange rate pass- through under PCP relative to LCP. In welfare terms however, the situation is reversed. A tariff under LCP leads to a fall in short-run welfare, as consumption and investment fall sharply, while the same tariff may be welfare enhancing under PCP. Under dollar currency pricing (DCP), we find results intermediate between the two invoicing regimes. With retaliation, the stark difference in pricing regimes is attenuated.

Suggested Citation

  • Stéphane Auray & Michael B. Devereux & Aurélien Eyquem, 2026. "The Pass-through of Tariffs and Exchange Rates," NBER Working Papers 35398, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:35398
    Note: IFM
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    More about this item

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications

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