The Pass-through of Tariffs and Exchange Rates / Stéphane Auray, Michael B. Devereux, Aurélien Eyquem.

Format:

Book

Author/Creator:

Auray, Stéphane.

Contributor:

Devereux, Michael B.

Eyquem, Aurélien.

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w35398.

NBER working paper series no. w35398

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2026.

Summary:

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.

Notes:

July 2026.

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