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Global dollar shocks and the development drag index

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  • Rajhi, Wassim

Abstract

This paper quantifies how global dollar shocks redistribute macro-financial stress toward developing economies. We construct an annual country-year indicator, the Development Drag Index (DDI), which measures the recurring cost of dollar dependence as a share of GDP. The DDI aggregates import price pass-through, reserve carry costs, and sovereign spreads on foreign-currency debt. Using a shift-share two-way fixed effects design for 2016–2024, we interact common dollar shocks with time-invariant country exposure. Quantitatively, crisis-scale dollar appreciations are associated with an increase in the DDI for highly dollar-exposed developing economies, while routine dollar movements have no detectable effect.

Suggested Citation

  • Rajhi, Wassim, 2026. "Global dollar shocks and the development drag index," Economics Letters, Elsevier, vol. 259(C).
    • Handle: RePEc:eee:ecolet:v:259:y:2026:i:c:s0165176525006147
    DOI: 10.1016/j.econlet.2025.112777
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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