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What Explains Global Exchange Rate Movements During the Financial Crisis?

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Author Info
Marcel Fratzscher () (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)

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Abstract

A striking and unexpected feature of the financial crisis has been the sharp appreciation of the US dollar against virtually all currencies globally. The paper finds that negative US-specific macroeconomic shocks during the crisis have triggered a significant strengthening of the US dollar, rather than a weakening. Macroeconomic fundamentals and financial exposure of individual countries are found to have played a key role in the transmission process of US shocks: in particular countries with low FX reserves, weak current account positions and high direct financial exposure vis-à-vis the United States have experienced substantially larger currency depreciations during the crisis overall, and to US shocks in particular. JEL Classification: F31, F4, G1.

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Paper provided by European Central Bank in its series Working Paper Series with number 1060.

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Length: 44 pages
Date of creation: Jun 2009
Date of revision:
Handle: RePEc:ecb:ecbwps:20091060

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Keywords: Financial crisis; exchange rates; global imbalances; shocks; United States; US dollar; transmission channels.;

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