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Global risk and the dollar

Author

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  • Georgiadis, Georgios
  • Müller, Gernot J.
  • Schumann, Ben

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. JEL Classification: F31, F42, F44

Suggested Citation

  • Georgiadis, Georgios & Müller, Gernot J. & Schumann, Ben, 2021. "Global risk and the dollar," Working Paper Series 2628, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20212628
    Note: 2435756
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    Cited by:

    1. Lodge, David & Manu, Ana-Simona, 2022. "EME financial conditions: Which global shocks matter?," Journal of International Money and Finance, Elsevier, vol. 120(C).
    2. Kuester, Keith & Corsetti, Giancarlo & Müller, Gernot & Schmidt, Sebastian, 2021. "The Exchange Rate Insulation Puzzle," CEPR Discussion Papers 15689, C.E.P.R. Discussion Papers.
    3. Fisera, Boris & Workie Tiruneh, Menbere & Hojdan, David, 2021. "Currency depreciations in emerging economies: A blessing or a curse for external debt management?," International Economics, Elsevier, vol. 168(C), pages 132-165.
    4. Khalil, Makram & Strobel, Felix, 2021. "US trade policy and the US dollar," Discussion Papers 49/2021, Deutsche Bundesbank.
    5. Miranda-Agrippino, Silvia & Nenova, Tsvetelina, 2022. "A tale of two global monetary policies," Journal of International Economics, Elsevier, vol. 136(C).
    6. Lodge, David & Manu, Ana-Simona & Van Robays, Ine, 2023. "China’s footprint in global financial markets," Working Paper Series 2861, European Central Bank.

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    More about this item

    Keywords

    Bayesian proxy structural VAR; counterfactual; global risk shocks; minimum relative entropy; US dollar exchange rate;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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