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The Dollar and Emerging Market Economies: Financial Vulnerabilities Meet the International Trade System

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Abstract

This paper shows that dollar appreciations lead to declines in GDP, investment, and credit to the private sector in emerging market economies (EMEs). These results imply that the transmission of dollar movements to EMEs occurs mainly through financial conditions rather than net exports, contrary to what would be expected from the conventional Mundell-Fleming model. Moreover, the central role of the U.S. dollar in global trade invoicing and financing - the dominant currency paradigm - and the increased integration of EMEs into international supply chains weaken the traditional trade channel. Finally, as expected if financial vulnerabilities are prominent, EMEs with higher exposure to credit denominated in dollars and lower monetary policy credibility experience greater contractions during dollar appreciations.

Suggested Citation

  • Samer Shousha, 2019. "The Dollar and Emerging Market Economies: Financial Vulnerabilities Meet the International Trade System," International Finance Discussion Papers 1258, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:1258
    DOI: 10.17016/IFDP.2019.1258
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    Cited by:

    1. Burcu Erik & Marco J. Lombardi & Dubravko Mihaljek & Hyun Song Shin, 2020. "The Dollar, Bank Leverage, and Real Economic Activity: An Evolving Relationship," AEA Papers and Proceedings, American Economic Association, vol. 110, pages 529-534, May.
    2. Arslanalp, Serkan & Eichengreen, Barry & Simpson-Bell, Chima, 2023. "Gold as international reserves: A barbarous relic no more?," Journal of International Economics, Elsevier, vol. 145(C).
    3. Mateane, Lebogang, 2023. "Risk preferences, global market conditions and foreign debt: Is there any role for the currency composition of FX reserves?," Research in Economics, Elsevier, vol. 77(3), pages 402-418.
    4. Bhushan Praveen Jangam & Hari Venkatesh, 2022. "Global Value Chains and Exchange Rate Disconnect," Economic Papers, The Economic Society of Australia, vol. 41(4), pages 347-359, December.
    5. Georgiadis, Georgios & Müller, Gernot J. & Schumann, Ben, 2024. "Global risk and the dollar," Journal of Monetary Economics, Elsevier, vol. 144(C).
    6. Otaviano Canuto, 2023. "Capital flows and emerging market economies since the global financial crisis," Research papers & Policy papers on Economic Trends and Policies 2301, Policy Center for the New South.
    7. Boris Hofmann & Taejin Park, 2020. "The broad dollar exchange rate as an EME risk factor," BIS Quarterly Review, Bank for International Settlements, December.
    8. Valentina Bruno & Hyun Song, 2023. "Dollar and Exports," The Review of Financial Studies, Society for Financial Studies, vol. 36(8), pages 2963-2996.
    9. Yildirim, Zekeriya, 2022. "Global financial risk, the risk-taking channel, and monetary policy in emerging markets," Economic Modelling, Elsevier, vol. 116(C).
    10. Bampi, Rodrigo E. & Colombo, Jefferson A., 2021. "Heterogeneous effects of foreign exchange appreciation on industrial output: Evidence from disaggregated manufacturing data," The Quarterly Review of Economics and Finance, Elsevier, vol. 80(C), pages 431-451.
    11. LIU, Jingting & TAN, Sook Rei & CHIA, Wai Mun, 2024. "Exposure to Dollar, financial Openness, and the heterogeneous impact of US monetary spillover," Journal of International Money and Finance, Elsevier, vol. 143(C).
    12. Nicolas Eterovic & Dalibor Eterovic, 2022. "Stocks, Bonds and the US Dollar - Measuring Domestic and International Market Developments in an Emerging Market," Working Papers Central Bank of Chile 964, Central Bank of Chile.

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    More about this item

    Keywords

    Dollar; Balance sheet mismatch; Dominant currency paradigm; global value chains; Monetary policy credibility;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • 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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