S9 Ep50: Tariffs, Uncertainty, and the Exchange Rate

Textbook economics says a tariff should strengthen a country's currency. Since the start of 2025, as US tariffs rose ... and the dollar fell.

In the first of four episodes of Voxtalks based on papers presented at the second Economic Policy: Papers on European and Global Issues conference, Alfonso Merendino (Bocconi University) and Tommaso Monacelli (Bocconi University, CEPR) tell Tim Phillips what they found when they looked for reasons. Their conclusion: for tariffs, it's not size, it is how permanent people expect it to be. They call this structural trade policy uncertainty.

When that uncertainty is low, a tariff behaves exactly as the textbook says. When it's high, the same tariff can weaken the currency, shrink output and pull down inflation instead.

The research behind this episode:

Merendino, Alfonso, and Tommaso Monacelli. 2026. "Tariffs, Uncertainty, and the Exchange Rate." Conference draft, presented at the 2nd Economic Policy: Papers on European and Global Issues Conference, Venice, 19-20 June 2026. Forthcoming in Economic Policy.

To cite this episode:

Phillips, Tim, Tommaso Monacelli, and Alfonso Merendino. 2026. "Tariffs, Uncertainty, and the Exchange Rate." VoxTalks Economics (podcast).

About the guests

Tommaso Monacelli is Professor of Economics at Bocconi University and a Research Fellow of IGIER Bocconi and CEPR. His research spans international macroeconomics, monetary policy and the business cycle, with recent work on tariffs and monetary policy, supply chain uncertainty and inflation, and heterogeneous bank models of monetary transmission. He is co-editor of the Journal of International Economics and was managing co-editor of Economic Policy from 2016 to 2021.

Alfonso Merendino is a PhD student in Economics at Yale University and a Research Fellow at the Social Economics Lab. He recently completed a research placement in macroeconomic modelling at the European Central Bank, and holds a Bachelor's and Master's degree in Economics from Bocconi University, where this paper was written.

Research cited in this episode

Structural trade-policy uncertainty (S-TPU). The paper's central measure, capturing uncertainty not about the size of a tariff but about how persistent the trade-policy regime behind it will be. Merendino and Monacelli split observed US tariff rates from 1990 to 2025 into a persistent component and a short-lived transitory one, using a state-space model with separate volatility for each, and define S-TPU as the volatility of the persistent component.