E2026017                             2026-09-30

Xinxin Wei  Changhua Yu  Muhammad Ali Nasir

Abstract

The U.S.–China trade war has important but underexplored implications for price stability. This paper examines the effects of trade-war shocks on market-based inflation compensation using daily U.S. data from 2016 to 2026. We identify structural trade-war shocks via event-day heteroskedasticity, exploiting the sharp rise in financial-market volatility on major announcement days. In a system that includes inflation compensation, equity returns, Treasury yields, the VIX, and credit spreads, we find that adverse trade-war shocks lower inflation compensation, depress equity prices and long-term yields, raise volatility, and widen credit spreads. Decomposing inflation compensation shows that the decline is driven primarily by lower expected inflation and a residual premium component, while TIPS liquidity plays a minor role. These patterns indicate that financial markets interpret trade-war shocks mainly through weaker growth expectations and higher risk premia rather than persistent cost-push inflation. The effects vary with policy uncertainty, shock persistence, news direction, and political regimes. Overall, our results highlight how trade policy uncertainty shapes inflation compensation and macro-financial stability.

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