"To what extent are tariffs offset by exchange rates?" with Olivier Jeanne 

Journal of International Money and Finance, 2024

Other versions: NBER WP, CEPR DP

Abstract: In theory, tariffs should be partially offset by a currency appreciation in the tariff-imposing country or by a depreciation in the country on which the tariff is imposed. We find, based on a calibrated model, that the tariffs imposed by the US in 2018-19 should not have had a large impact on the dollar but may have significantly depreciated the renminbi. This prediction is consistent with a high-frequency event analysis looking at the impact of tariff-related news on the dollar and the renminbi. We find that tariffs explained at most one fifth of the dollar effective appreciation but around two thirds of the renminbi effective depreciation observed in 2018-19.

"Sectoral Trade-offs, Labor Mobility and Exchange Rate Management"

(Working Paper)

Abstract: Many emerging market economies float their exchange rates while simultaneously managing them through capital controls or foreign exchange intervention. This paper rationalizes managed floating in a small open economy model with imperfect inter-sectoral labor mobility and nominal wage rigidities. These frictions generate a sectoral trade-off of monetary policy: monetary policy can stabilize the tradable sector but at the cost of destabilizing the non-tradable sector, and vice versa. Managing the exchange rate with an additional instrument to stabilize the tradable sector alleviates this trade-off. By separately calibrating the model to emerging market economies and advanced economies, we show that the welfare gains from exchange rate management are larger in emerging market economies due to lower inter-sectoral labor mobility and higher persistence and volatility of shocks. The paper also compares monetary autonomy gained from floating the exchange rate and using capital controls, two ways of achieving monetary autonomy in the Mundell-Fleming Trilemma. We find that in response to global financial shocks, effective monetary autonomy gained from capital controls is more valuable while in response to terms-of-trade shocks, the opposite holds.