The Dollar Exchange Rate as a Global Risk Factor: Evidence from Investment

43 Pages Posted: 31 Jan 2018

See all articles by Stefan Avdjiev

Stefan Avdjiev

Bank for International Settlements (BIS)

Valentina Bruno

American University - Department of Finance and Real Estate

Cathérine Koch

Bank for International Settlements (BIS)

Hyun Song Shin

Bank for International Settlements (BIS)

Date Written: January 2018

Abstract

Exchange rate fluctuations influence economic activity not only via the standard trade channel, but also through a financial channel, which operates through the impact of exchange rate fluctuations on borrowers' balance sheets and lenders' risk-taking capacity. This paper explores the "triangular" relationship between (i) the strength of the US dollar, (ii) cross-border bank flows and (iii) real investment. We conduct two sets of empirical exercises - a macro (country-level) study and a micro (firm-level) study. We find that a stronger dollar is associated with lower growth in dollar-denominated cross-border bank flows and lower real investment in emerging market economies. An important policy implication of our findings is that a stronger dollar has real macroeconomic effects that go in the opposite direction to the standard trade channel.

Keywords: financial channel, exchange rates, cross-border bank lending, real investment

JEL Classification: F31, F32, F34, F41

Suggested Citation

Avdjiev, Stefan and Bruno, Valentina Giulia and Koch, Catherine and Shin, Hyun Song, The Dollar Exchange Rate as a Global Risk Factor: Evidence from Investment (January 2018). BIS Working Paper No. 695. Available at SSRN: https://ssrn.com/abstract=3113505

Stefan Avdjiev (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Valentina Giulia Bruno

American University - Department of Finance and Real Estate ( email )

Kogod School of Business
4400 Massachusetts Ave., N.W.
Washington, DC 20016-8044
United States

HOME PAGE: http://www.american.edu/kogod/faculty/bruno.cfm

Catherine Koch

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Hyun Song Shin

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

HOME PAGE: http://www.bis.org/author/hyun_song_shin.htm

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