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Global Risk and the Dollar

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  • Müller, Gernot
  • Georgiadis, Georgios
  • Schumann, Ben

Abstract

How does global risk impact the world economy? In taking up this question, we focus on the dollar’s role in the international adjustment mechanism. First, we rely on high-frequency surprises in the price of gold to identify the effects of global risk shocks in a Bayesian Proxy VAR model. They cause a synchronized contraction of global economic activity and appreciate the dollar. Other key financial indicators adjust in line with predictions of recent theoretical work. Second, we illustrate through counterfactuals that the dollar appreciation amplifies the adverse impact of global risk shocks outside of the US via a financial channel.

Suggested Citation

  • Müller, Gernot & Georgiadis, Georgios & Schumann, Ben, 2021. "Global Risk and the Dollar," CEPR Discussion Papers 16245, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:16245
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    3. Miranda-Agrippino, Silvia & Nenova, Tsvetelina, 2022. "A tale of two global monetary policies," Journal of International Economics, Elsevier, vol. 136(C).
    4. Lodge, David & Manu, Ana-Simona & Van Robays, Ine, 2023. "China’s footprint in global financial markets," Working Paper Series 2861, European Central Bank.
    5. Fisera, Boris, 2024. "Exchange rates and the speed of economic recovery: The role of financial development," Economic Systems, Elsevier, vol. 48(1).
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    7. Kuester, Keith & Corsetti, Giancarlo & Müller, Gernot & Schmidt, Sebastian, 2021. "The Exchange Rate Insulation Puzzle," CEPR Discussion Papers 15689, C.E.P.R. Discussion Papers.
    8. Lodge, David & Manu, Ana-Simona, 2022. "EME financial conditions: Which global shocks matter?," Journal of International Money and Finance, Elsevier, vol. 120(C).
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    More about this item

    Keywords

    Us dollar; Safe-haven currencies; Risk shocks; Trade channel; Financial channel; Bayesian proxy structural var; Minimum relative entropy; Counterfactual; Monetary policy;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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