The Multifaceted Impact of US Trade Policy on Financial Markets

Discussion Papers 1956, 76 S.

Lukas Boer, Lukas Menkhoff, Malte Rieth

2021

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Abstract

We study the multifaceted effects and persistence of trade policy shocks on financial markets in a structural vector autoregression. The model is identified via event day heteroskedasticity. We find that restrictive US trade policy shocks affect US and international stock prices heterogeneously, but generally negatively, increasing market uncertainty, lowering interest rates, and leading to an appreciation of the US-Dollar. The effects are significant for several weeks or quarters. Regarding shock types, we reveal a dominating trade policy uncertainty shock and a weaker level shock. Chinese trade policy shocks against the US further hurt US stocks.

Lukas Boer

Research Associate in the International Economics Department

Lukas Menkhoff

Head of Department in the International Economics Department

Malte Rieth

Research Associate in the Macroeconomics Department



JEL-Classification: C32;F13;F51;G10
Keywords: Trade policy shock; structural VAR; stock prices; exchange rates; interest rates; heteroskedasticity

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