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Board of Governors of the Federal Reserve System (U.S.)
International Finance Discussion Papers
The Dollar and Emerging Market Economies: Financial Vulnerabilities Meet the International Trade System
Samer Shousha
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.


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Samer Shousha, The Dollar and Emerging Market Economies: Financial Vulnerabilities Meet the International Trade System, Board of Governors of the Federal Reserve System (U.S.), International Finance Discussion Papers 1258, 04 Oct 2019.
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Keywords: Dollar ; Balance sheet mismatch ; Dominant currency paradigm ; Global value chain ; Monetary policy credibility
DOI: 10.17016/IFDP.2019.1258
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