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The Financial Channel of the Exchange Rate and Global Trade

Author

Listed:
  • Sai Ma
  • Tim Schmidt-Eisenlohr

Abstract

This paper provides evidence that the U.S. dollar affects countries’ exports through the financial channel of the exchange rate (Bruno and Shin (2015)). Using global data on trade between countries whose currency is not the U.S. dollar, it documents a positive relationship between the dollar and import prices. Importantly, this effect is stronger when the dollar share of the exporter’s foreign borrowing is larger. Results strengthen substantially when instrumenting the dollar by U.S. domestic housing activity. Then, a dollar appreciation increases import prices and decreases import quantities, with effects being proportional to the source country’s foreign dollar borrowing share.

Suggested Citation

  • Sai Ma & Tim Schmidt-Eisenlohr, 2023. "The Financial Channel of the Exchange Rate and Global Trade," CESifo Working Paper Series 10495, CESifo.
    • Handle: RePEc:ces:ceswps:_10495
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    File URL: https://www.cesifo.org/DocDL/cesifo1_wp10495.pdf
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    References listed on IDEAS

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    Cited by:

    1. Bryan Hardy & Felipe Saffie & Ina Simonovska, "undated". "Trade credit and exchange rate risk pass through," BIS Working Papers 1216, Bank for International Settlements.

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    More about this item

    Keywords

    dollar; dominant currency; financial channel; international trade;
    All these keywords.

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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