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
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
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Journal Article: The Dollar Exchange Rate as a Global Risk Factor: Evidence from Investment (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:695
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