Global Risk and the Dollar
52 Pages Posted: 18 Dec 2021
Date Written: December 1, 2021
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 pre-dictions 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.
Keywords: Bayesian proxy structural VAR, counterfactual, global risk shocks, minimum relative entropy, US dollar exchange rate
JEL Classification: F31, F42, F44
Suggested Citation: Suggested Citation