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The Dollar Exchange Rate as a Global Risk Factor: Evidence from Investment

  • Stefan AvdjievEmail author
  • Valentina Bruno
  • Catherine Koch
  • Hyun Song Shin
Research Article
  • 25 Downloads

Abstract

Exchange rate fluctuations could 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 (1) the strength of the US dollar, (2) cross-border bank flows and (3) 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 US dollar has real macroeconomic effects that go in the opposite direction to the standard trade channel.

JEL Classification

F31 F32 F34 F41 

Notes

Acknowledgements

We thank Signe Krogstrup, Amal Mattoo, Linda Tesar, three anonymous referees, participants at the IMF 18th Jacques Polak Annual Research Conference and seminar participants at the Federal Reserve Board for valuable comments and suggestions. Bat-el Berger and Zuzana Filková provided excellent research assistance. The views expressed are those of the authors and not necessarily those of the Bank for International Settlements.

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Copyright information

© International Monetary Fund 2019

Authors and Affiliations

  • Stefan Avdjiev
    • 1
    Email author
  • Valentina Bruno
    • 2
  • Catherine Koch
    • 1
  • Hyun Song Shin
    • 1
  1. 1.Bank for International SettlementsBaselSwitzerland
  2. 2.American UniversityWashingtonUSA

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