The Pass-through of Tariffs and Exchange Rates

Stéphane Auray, Michael Devereux and Aurélien Eyquem

No 35398, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: F31 F40 F42 F47 (search for similar items in EconPapers)
Date: 2026-07
Note: IFM
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.nber.org/papers/w35398.pdf (application/pdf)
Access to the full text is generally limited to series subscribers, however if the top level domain of the client browser is in a developing country or transition economy free access is provided. More information about subscriptions and free access is available at http://www.nber.org/wwphelp.html. Free access is also available to older working papers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:35398

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w35398
The price is Paper copy available by mail.

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().