Global Risk and the Dollar

52 Pages Posted: 18 Dec 2021

See all articles by Georgios Georgiadis

Georgios Georgiadis

European Central Bank (ECB)

Gernot J. Müller

University of Tuebingen - Department of Economics

Ben Schumann

European Central Bank (ECB)

Multiple version iconThere are 2 versions of this paper

Date Written: December 1, 2021

Abstract

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

Georgiadis, Georgios and Müller, Gernot J. and Schumann, Ben, Global Risk and the Dollar (December 1, 2021). ECB Working Paper No. 2021/2628, Available at SSRN: https://ssrn.com/abstract=3988519 or http://dx.doi.org/10.2139/ssrn.3988519

Georgios Georgiadis (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Gernot J. Müller

University of Tuebingen - Department of Economics ( email )

Mohlstrasse 36
D-72074 Tuebingen, 72074
Germany

Ben Schumann

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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