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Dominant Currency Shocks and Foreign Exchange Pressure in the Periphery

Aleksandr Gevorkyan and Tarron Khemraj ()

No 2022-01, SCEPA working paper series. from Schwartz Center for Economic Policy Analysis (SCEPA), The New School

Abstract: The paper assesses the effects of dominant currency shocks (strong US dollar) on emerging markets by studying exchange market pressure (EMP) or foreign exchange (FX) liquidity, GDP growth, external debt, and inflation. The literature emphasizes inflation passthrough, trade volume and GDP growth contraction in the periphery following a strong dollar. Comparing the dollar shock with euro and commodity price shocks and employing pooled mean group estimates and panel VAR across regimes of trade invoicing, this paper shows that bilateral depreciation can decrease FX liquidity and GDP growth in the periphery, failing to achieve the conventional macroeconomic adjustments of a competitive depreciation. A strong dollar reduces external debt, but strong euro has the opposite effect, implying circumvention of the ‘original sin.' An EMP, FX liquidity, shock from the periphery appreciates the US dollar, affirming dollar's safehaven status. These findings have implications for balance of payments and exchange rate policy management.

Keywords: dominant currency pricing; exchange market pressure; international monetary system; nominal spillovers (search for similar items in EconPapers)
JEL-codes: E21 E24 I14 J32 J38 J62 J83 (search for similar items in EconPapers)
Date: 2022-04
New Economics Papers: this item is included in nep-eec, nep-fdg, nep-mon and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:epa:cepawp:2022-01

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