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The dollar exchange rate as a global risk factor: evidence from investment

Stefan Avdjiev (), Valentina Bruno and Catherine Koch ()

No 695, BIS Working Papers from Bank for International Settlements

Abstract: Exchange rate fluctuations 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 (i) the strength of the US dollar, (ii) cross-border bank flows and (iii) 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 dollar has real macroeconomic effects that go in the opposite direction to the standard trade channel.

Keywords: financial channel; exchange rates; cross-border bank lending; real investment (search for similar items in EconPapers)
JEL-codes: F31 F32 F34 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn and nep-opm
Date: 2018-01
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