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The Nature of the Shock Matters: Some Model-Based Results on the Macroeconomic Effects of Exchange Rate

Sophie Haincourt ()

A chapter in International Macroeconomics in the Wake of the Global Financial Crisis, 2018, pp 233-247 from Springer

Abstract: Abstract Exchange rate fluctuations have been particularly large since mid-2014, with the nominal effective exchange rate of the Dollar appreciating 22% between July 2014 and December 2016, well above normal fluctuation range. This article attempts to measure the impact of currency appreciation on domestic activity, accounting for the source of fluctuations. More specifically, by using the multi-country structural model NiGEM, we show that different types of exchange rate shocks can have different macroeconomic outcomes. Focusing on the period going from mid-2014 to December 2016, we show that the initial appreciation of the Dollar (from July 2014 to April 2015), coming from activity gaps and divergence in monetary policy expectations, choke 0.3 pp off US GDP growth, while the following phase of the currency appreciation, stemming from a fall in the Dollar risk premium would have been neutral, and even slightly positive, to US growth. When comparing the US with the euro area as regards the impact on growth, we get that the euro area is more sensitive than the US to a currency appreciation. As a result, a sustained rise in the currency could prove more challenging for the Euro area than for the US.

Date: 2018
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DOI: 10.1007/978-3-319-79075-6_12

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