Collateral Damage: Dollar Strength and Emerging Markets’ Growth

43 Pages Posted: 14 Sep 2015

See all articles by Pablo Druck

Pablo Druck

International Monetary Fund (IMF)

Nicolás E. Magud

International Monetary Fund (IMF)

Rodrigo Mariscal

El Colegio de Mexico; Mexico's Ministry of Finance

Date Written: July 2015

Abstract

We document that, historically, although stronger growth in the U.S. increases growth in emerging markets, U.S. dollar appreciation (depreciation) cycles - which are highly persistent - mitigate (amplify) the impact on real GDP growth in emerging markets. We argue that the main transmission channel of the latter is through an income effect: as the dollar appreciates, commodity prices fall; weaker commodity prices depress domestic demand via lower real income; real GDP in emerging markets decelerates; and vice versa. These effects hold despite any potential expenditure-switching effect resulting from the relative (to the U.S. dollar) currency depreciation of emerging market economies. We also show the negative effect on emerging markets’ growth of U.S. interest rates beyond the effects of the U.S. real exchange rate and real GDP growth. Therefore, at the time of writing, emerging markets’ growth is expected to remain subdued reflecting, intera alia, the expected persistence of the strong dollar and the anticipated increased in the U.S. interest rates.

Keywords: Dollar appreciation cycles, growth in emerging markets.

JEL Classification: E23, E32, F31, F41, F44

Suggested Citation

Druck, Pablo and Magud, Nicolas E. and Mariscal, Rodrigo, Collateral Damage: Dollar Strength and Emerging Markets’ Growth (July 2015). IMF Working Paper No. 15/179, Available at SSRN: https://ssrn.com/abstract=2659536

Pablo Druck (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Nicolas E. Magud

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Rodrigo Mariscal

El Colegio de Mexico ( email )

Camino al Ajusco 20
Col. Pedregal de Santa Teresa
Mexico, City, 10740
Mexico

HOME PAGE: http://www.colmex.mx/

Mexico's Ministry of Finance ( email )

Av. Insurgentes Sur No. 1971
Torre III, Piso 9
Mexico City, CDMX 01020
Mexico

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