The Dollar Exchange Rate as a Global Risk Factor: Evidence from Investment
Stefan Avdjiev (),
Catherine Koch and
Hyun Song Shin
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Catherine Koch: Bank for International Settlements
Authors registered in the RePEc Author Service: Catherine Tahmee Casanova ()
IMF Economic Review, 2019, vol. 67, issue 1, No 6, 173 pages
Abstract Exchange rate fluctuations could influence economic activity not only via the standard trade channel, but also through a financial channel, which operates through the impact of exchange rate fluctuations on borrowers’ balance sheets and lenders’ risk-taking capacity. This paper explores the “triangular” relationship between (1) the strength of the US dollar, (2) cross-border bank flows and (3) real investment. We conduct two sets of empirical exercises—a macro (country-level) study and a micro (firm-level) study. We find that a stronger dollar is associated with lower growth in dollar-denominated cross-border bank flows and lower real investment in emerging market economies. An important policy implication of our findings is that a stronger US dollar has real macroeconomic effects that go in the opposite direction to the standard trade channel.
JEL-codes: F31 F32 F34 F41 (search for similar items in EconPapers)
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