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The dollar squeeze and economic growth

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  • Lim, Jamus Jerome
  • Long, Xin

Abstract

We study how deviations from covered interest parity — captured by the cross-currency basis (CCB) — affect output growth. Using quarterly data for advanced economies (AEs) and emerging markets (EMs) in panel VAR and IV-local-projections models, we find that positive CCB shocks reduce output, implying that easier dollar funding conditions can be contractionary. While dollar liquidity still supports growth during acute stress episodes in AEs, it has the opposite effect in normal times. In AEs, exchange-rate appreciation compensates holders of local-currency assets, eroding export competitiveness and lowering growth. In EMs, easier dollar access encourages shifts into local-currency assets, crowding out domestic liquidity and dampening activity.

Suggested Citation

  • Lim, Jamus Jerome & Long, Xin, 2026. "The dollar squeeze and economic growth," Journal of Macroeconomics, Elsevier, vol. 87(C).
    • Handle: RePEc:eee:jmacro:v:87:y:2026:i:c:s0164070426000030
    DOI: 10.1016/j.jmacro.2026.103740
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    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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