Real Exchange Rates and the Global Financial Cycle

Jonathan Davis and Andrei Zlate

No 2416, Working Papers from Federal Reserve Bank of Dallas

Abstract: This paper looks at the effect of fluctuations in the global financial cycle on real exchange rates (RER). We show that, on average, a downturn in the global financial cycle leads to RER depreciation relative to the U.S. dollar. However, quantitatively there is considerable heterogeneity in the RER responses among advanced, emerging and developing economies; between net creditor and net debtor countries; and also over time. Prior to 2007, the global financial cycle had less effect on advanced than on emerging market economies' RER, whereas post-2007 the effect was about the same in the two groups of countries. Finally, we decompose the RER changes into changes in the nominal exchange rate and changes in aggregate price levels. We find that in advanced economies, nearly all RER adjustment occurred through nominal exchange rates throughout the sample period. In the emerging and developing economies, the RER adjustment was mixed prior to 2007, when changes in the RER were driven by both nominal exchange rate changes and inflation differentials, whereas nominal exchange rate adjustments dominated post-2007.

Keywords: global financial cycle; real exchange rates (search for similar items in EconPapers)
JEL-codes: F3 F4 (search for similar items in EconPapers)
Pages: 26
Date: 2024-11-26
New Economics Papers: this item is included in nep-fdg, nep-mon and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:fip:feddwp:99214

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DOI: 10.24149/wp2416

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