The Global Dollar Cycle

Maurice Obstfeld and Haonan Zhou

No 31004, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The U.S. dollar’s nominal effective exchange rate closely tracks global financial conditions, which themselves show a cyclical pattern. Over that cycle, world asset prices, leverage, and capital flows move in concert with global growth, especially influencing the fortunes of emerging and developing economies (EMDEs). This paper documents that dollar appreciation shocks predict economic downturns in EMDEs and highlights policies countries could implement to dampen the effects of dollar fluctuations. Dollar appreciation shocks themselves are highly correlated not just with tighter U.S. monetary policies, but also with measures of U.S. domestic and international dollar funding stress that themselves reflect global investors’ risk appetite. After the initial market panic and upward dollar spike at the start of the COVID-19 pandemic, the dollar fell as global financial conditions eased; but the higher inflation that followed has induced central banks everywhere to tighten monetary policies more recently. The dollar has strengthened considerably since mid-2021 and a contractionary phase of the global financial cycle is now under way. Owing to increases in public- and business-sector debts during the pandemic, a strong dollar, higher interest rates, and slower economic growth will be challenging for EMDEs.

JEL-codes: E58 F31 F41 F44 O11 (search for similar items in EconPapers)
Date: 2023-03
New Economics Papers: this item is included in nep-ban, nep-cba, nep-fdg, nep-ifn, nep-mon and nep-opm
Note: EFG IFM
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Citations: View citations in EconPapers (13)

Published as Maurice Obstfeld & Haonan Zhou, 2022. "The Global Dollar Cycle," Brookings Papers on Economic Activity, vol 2022(2), pages 361-447.

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Working Paper: The Global Dollar Cycle (2023)
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