The Broad Dollar Exchange Rate as an EME Risk Factor
14 Pages Posted: 29 Mar 2022
Date Written: December 7, 2020
Abstract
US dollar appreciation is associated with a darkening of the economic outlook for emerging market economies (EMEs). Using data from 21 EMEs, we find that a 1 percentage point (ppt) appreciation shock to the dollar against a broad basket of currencies dampens the growth outlook by over 0.3 ppt and growth-at-risk (the lowest 5% of growth outcomes) by 0.6 ppt. Dollar appreciation adversely affects investment growth-at-risk in particular and even export growth-at-risk, indicating that global financial conditions play a key role. Indeed, the negative impact is significantly larger in countries with high dollar debt or high foreign presence in local currency bond markets.
JEL Classification: F31, F34, F36, F41, F44
Suggested Citation: Suggested Citation