Working Paper

The Dollar and Emerging Market Economies: Financial Vulnerabilities Meet the International Trade System

Abstract: This paper shows that dollar appreciations lead to declines in GDP, investment, and credit to the private sector in emerging market economies (EMEs). These results imply that the transmission of dollar movements to EMEs occurs mainly through financial conditions rather than net exports, contrary to what would be expected from the conventional Mundell-Fleming model. Moreover, the central role of the U.S. dollar in global trade invoicing and financing - the dominant currency paradigm - and the increased integration of EMEs into international supply chains weaken the traditional trade channel. Finally, as expected if financial vulnerabilities are prominent, EMEs with higher exposure to credit denominated in dollars and lower monetary policy credibility experience greater contractions during dollar appreciations.

Keywords: Dollar; Balance sheet mismatch; Dominant currency paradigm; global value chains; Monetary policy credibility;

JEL Classification: F31; F34; F36; F41; F44;

https://doi.org/10.17016/IFDP.2019.1258

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: International Finance Discussion Papers

Publication Date: 2019-10-04

Number: 1258

Pages: 32 pages