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

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  • Stefan Avdjiev
  • Valentina Bruno
  • Catherine Koch

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.

Suggested Citation

  • Stefan Avdjiev & Valentina Bruno & Catherine Koch, 2018. "The dollar exchange rate as a global risk factor: evidence from investment," BIS Working Papers 695, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:695
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    More about this item

    Keywords

    financial channel; exchange rates; cross-border bank lending; real investment;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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