The Dollar after the Tariff War
Paper Session
Saturday, Jan. 3, 2026 10:15 AM - 12:15 PM (EST)
This session will be streamed live.
- Chair: Martin Uribe, Columbia University
International Currency Competition
Abstract
We explore how major global shocks like the ongoing global tariff war affects the measured reputation of the dollar and other currencies. We study how countries compete to become an international safe asset provider. Governments in our model issue debt to a common set of investors, resulting in competition as issuance by one country raises required yields for all countries. Governments are tempted ex post to engage in expropriation or capital controls, and can build reputation as a safe asset provider by resisting temptation to do so. We show how increased competition deters countries from building reputation, leaving more countries stuck at low reputation levels and unable to supply safe assets. We derive a model-implied measure of country reputation. We estimate this reputation measure using micro-data on investor portfolio holdings, and use it to track the evolution of countries’ reputation over time. We study how an incumbent safe asset provider, like the U.S., uses its issuance strategy to deter the emergence of competitors.Global Networks, Monetary Policy, and Trade
Abstract
We develop a novel framework to study the interaction between monetary policy andtrade. Our New Keynesian open economy model incorporates international production
networks, sectoral heterogeneity in price rigidities, and trade distortions. We
decompose the general equilibrium response to trade shocks into distinct channels that
account for demand shifts, policy effects, exchange rate adjustments, expectations,
price stickiness, and input–output linkages. Tariffs act simultaneously as demand and
supply shocks, leading to endogenous fragmentation through changes in trade and production
network linkages. We show that the net impact of tariffs on domestic inflation,
output, employment, and the dollar depends on the endogenous monetary policy response
in both the tariff-imposing and tariff-exposed countries, within a global general
equilibrium framework. Our quantitative exercise replicates the observed effects of the
2018 tariffs on the U.S. economy and predicts a 1.6 pp decline in U.S. output, a 0.8
pp rise in inflation, and a 4.8% appreciation of the dollar in response to a retaliatory
trade war linked to tariffs announced on “Liberation Day.” Tariff threats, even in the
absence of actual implementation, are self-defeating—leading to a 4.1% appreciation
of the dollar, 0.6% deflation, and a 0.7 pp decline in output, as agents re-optimize
in anticipation of future distortions. Interestingly, such “threats” also induce a sharp
depreciation of the dollar in the period following the initial announcement.
Debt Sustainability and the Dollar After the Tariff War
Abstract
US exceptionalism has allowed the United States to issue a quantity of public debt that is on par with that of all the other countries in the world. Until recently, this problem has seemed manageable given the steady fall in real interest rates. Indeed, in his 2019 Presidential address, Olivier Blanchard argued that the costs of bearing even higher debt were likely negligible for most advanced economies, certainly the US. This paper explores a political economy model of inflation, debt and interest rates in a world where the central bank cannot pre-commit to low inflation, and shows how deglobalization can lead to an overshoot in inflation and interest rates with lasting effects.Discussant(s)
Alessandro Dovis
,
University of Pennsylvania
Linda Tesar
,
University of Michigan
Maurice Obstfeld
,
University of California-Berkeley
JEL Classifications
- F3 - International Finance
- E4 - Money and Interest Rates