Tariffs and the Exchange Rate : Evidence from Twitter

This paper examines Mundell's conjecture that in a flexible exchange rate regime, an increase in tariffs on foreign goods leads to the real appreciation of the local currency or, conversely, to the real depreciation of the foreign currency (Mundell, 1961). We focus on the exchange rate market's reaction to government communication in the form of tweets by the U.S. president that contain information about possible tariff increases on Canadian and Mexican goods. Results show that the anticipation of trade restrictions by the U.S. leads to a 0:022% depreciation in the Canadian dollar, and a 0:049% depreciation in the Mexican peso, with respect to the U.S. dollar.

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