Dominant Currency Shocks and Foreign Exchange Pressure in the Periphery

Gevorkyan, A.V. and T. Khemraj. Forthcoming. Dominant currency shocks and foreign exchange pressure in the periphery. Review of Keynesian Economics (Spring 2024) https://www.elgaronline.com/view/journals/roke/roke-overview.xml

30 Pages Posted: 4 Oct 2022 Last revised: 12 Apr 2023

Date Written: December 19, 2022

Abstract

The spillover effects of strong dollar and euro, two dominant currencies, on emerging market economies (the periphery) are examined. This paper empirically studies the dominant currency shocks on foreign exchange (FX) constraint, economic growth, external debt, and inflation. Comparing the dollar shock to the euro and commodity price shocks and employing various empirical methodologies across regimes of trade invoicing and commodity dependence, this paper shows that appreciation of the trade weighted exchange rate (the dollar index) can worsen FX constraint and decrease growth in the periphery, failing to achieve the conventional macroeconomic adjustments of a competitive currency depreciation. A strong dollar reduces external debt, but a strong euro has the opposite effect. An FX-constraint shock emanating from the periphery appreciates the US dollar, affirming dollar’s safe-haven status. These findings have implications for balance of payments and exchange rate policy management for a larger group of emerging markets and developing economies.

Keywords: dominant currency, exchange market pressure, international monetary system, nominal spillovers, ‘original sin’

JEL Classification: F39, F40, F41, F44, F62, O11

Suggested Citation

Gevorkyan, Aleksandr V. and Khemraj, Tarron, Dominant Currency Shocks and Foreign Exchange Pressure in the Periphery (December 19, 2022). Gevorkyan, A.V. and T. Khemraj. Forthcoming. Dominant currency shocks and foreign exchange pressure in the periphery. Review of Keynesian Economics (Spring 2024) https://www.elgaronline.com/view/journals/roke/roke-overview.xml, Available at SSRN: https://ssrn.com/abstract=4235710 or http://dx.doi.org/10.2139/ssrn.4235710

Aleksandr V. Gevorkyan (Contact Author)

St. John's University ( email )

8000 Utopia Parkway
Queens, NY 11439
United States

Tarron Khemraj

New College of Florida ( email )

5800 Bay Shore Road
Sarasota, FL 34243-2109
United States

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