The Dollar Exchange Rate as a Global Risk Factor: Evidence from Investment

  • Stefan AvdjievEmail author
  • Valentina Bruno
  • Catherine Koch
  • Hyun Song Shin
Research Article


Exchange rate fluctuations could influence economic activity not only via the standard trade channel, but also through a financial channel, which operates through the impact of exchange rate fluctuations on borrowers’ balance sheets and lenders’ risk-taking capacity. This paper explores the “triangular” relationship between (1) the strength of the US dollar, (2) cross-border bank flows and (3) real investment. We conduct two sets of empirical exercises—a macro (country-level) study and a micro (firm-level) study. We find that a stronger dollar is associated with lower growth in dollar-denominated cross-border bank flows and lower real investment in emerging market economies. An important policy implication of our findings is that a stronger US dollar has real macroeconomic effects that go in the opposite direction to the standard trade channel.

JEL Classification

F31 F32 F34 F41 



We thank Signe Krogstrup, Amal Mattoo, Linda Tesar, three anonymous referees, participants at the IMF 18th Jacques Polak Annual Research Conference and seminar participants at the Federal Reserve Board for valuable comments and suggestions. Bat-el Berger and Zuzana Filková provided excellent research assistance. The views expressed are those of the authors and not necessarily those of the Bank for International Settlements.


  1. Abrigo, M., and I. Love. 2015. Estimation of Panel Vector Autoregression in Stata: A Package of Programs. University of Hawaii Working Paper.Google Scholar
  2. Arellano, M., and S. Bond. 1991. Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations. Review of Economic Studies 58(2): 277–297.CrossRefGoogle Scholar
  3. Avdjiev, S., and E. Takats. 2018. Monetary policy spillovers and currency networks in cross-border bank lending: lessons from the 2013 Fed Taper Tantrum. Review of Finance. Scholar
  4. Avdjiev, S., W. Du, C. Koch, and H.S. Shin. The Dollar, Bank Leverage and the Deviation from Covered Interest Parity. American Economic Review: Insights (forthcoming).Google Scholar
  5. Avdjiev, S., Z. Kuti, and E Takáts. 2012. The Euro Area Crisis and Cross-Border Bank Lending to Emerging Markets. BIS Quarterly Review, December, 37–47.Google Scholar
  6. Bank for International Settlements. 2015. Introduction to BIS Statistics. BIS Quarterly Review, September, 35–51.Google Scholar
  7. Bebczuk, R., A. Galindo, and U. Panizza. 2010. An Evaluation of the Contractionary Devaluation Hypothesis. In Economic Development in Latin America, Palgrave Macmillan, London. 102–117.Google Scholar
  8. Beck, T. 2014. Cross-Border Banking and Financial Deepening: The African Experience. Journal of African Economies 24: 32–45.CrossRefGoogle Scholar
  9. Bruno, V., and H.S. Shin. 2015a. Capital Flows and the Risk-Taking Channel of Monetary Policy. Journal of Monetary Economics 71: 119–132.CrossRefGoogle Scholar
  10. Bruno, V., and H.S. Shin. 2015b. Cross-Border Banking and Global Liquidity. Review of Economic Studies 82(2): 535–564.CrossRefGoogle Scholar
  11. Casas, C., F. Diez, G. Gopinath, and P.-O. Gourinchas. 2016. Dominant Currency Paradigm. NBER Working Paper, 22943.Google Scholar
  12. Cerutti, E., S. Claessens, and L. Ratnovski. 2017. Global Liquidity and Drivers of Cross-Border Bank Flows. Economic Policy 32(89): 81–125.CrossRefGoogle Scholar
  13. Céspedes, L.J., R. Chang, and A. Velasco. 2004. Balance Sheets and Exchange Rate Policy. The American Economic Review 94(4): 1183–1193.CrossRefGoogle Scholar
  14. Cetorelli, N., and L. Goldberg. 2011. Global Banks and International Shock Transmission: Evidence from the Crisis. IMF Economic Review 59(1): 41–76.CrossRefGoogle Scholar
  15. Claessens, S., H. Tong, and I. Zuccardi. 2015. Saving the Euro: Mitigating Financial or Trade Spillovers? Journal of Money, Credit and Banking 47(7): 1369–1402.CrossRefGoogle Scholar
  16. Druck, P., N. Magud, and R. Mariscal. 2018. Collateral Damage: Dollar Strength and Emerging Markets’ Growth. The North American Journal of Economics and Finance 43: 97–117.CrossRefGoogle Scholar
  17. Du, W., and J. Schreger. 2016. Local Currency Sovereign Risk. Journal of Finance 71(3): 1027–1070.CrossRefGoogle Scholar
  18. Eichengreen, B., and H. Tong. 2015. Effects of Renminbi Appreciation on Foreign Firms: The Role of Processing Exports. Journal of Development Economics 116(C): 146–157.CrossRefGoogle Scholar
  19. Forbes, K.J., and F. Warnock. 2012. Capital Flow Waves: Surges, Stops, Flight, and Retrenchment. Journal of International Economics 88: 235–251.CrossRefGoogle Scholar
  20. Goldberg, L., and S. Krogstrup. 2018. International Capital Flow Pressures. NBER Working Paper, 24286.Google Scholar
  21. Goldberg, L., and C. Tille. 2008. Vehicle Currency Use in International Trade. Journal of International Economics 76(2): 177–192.CrossRefGoogle Scholar
  22. Gopinath, G. 2015. The International Price System. In Jackson Hole Symposium, vol. 27. Kansas City Federal Reserve.Google Scholar
  23. Hofmann, B., I. Shim, and H.S. Shin. 2016. Sovereign Yields and the Risk-Taking Channel of Currency Appreciation. BIS Working Papers No. 538.Google Scholar
  24. Kearns, J., and N. Patel. 2016. Does the Financial Channel of Exchange Rates Offset the Trade Channel? BIS Quarterly Review, December 2016, 95–113.Google Scholar
  25. Kim, Y.J., L. Tesar, and J. Zhang. 2015. The Impact of Foreign Liabilities on Small Firms: Firm-Level Evidence from the Korean Crisis. Journal of International Economics 97: 209–230.CrossRefGoogle Scholar
  26. Kohn, D., F. Leibovici, and M. Szkup. 2017. Financial Frictions and Export Dynamics in Large Devaluations. Working Paper 2017-013A, Federal Reserve Bank of St. Louis.Google Scholar
  27. Krippner, L. 2015. Zero Lower Bound Term Structure Modeling: A Practitioner’s Guide. Berlin: Springer.CrossRefGoogle Scholar
  28. Krugman, P. 1999. Balance Sheets, the Transfer Problem, and Financial Crises. International Tax and Public Finance 6(4): 459–472.CrossRefGoogle Scholar
  29. Lütkepohl, H. 2007. New Introduction to Multiple Time Series Analysis. Berlin: Springer.Google Scholar
  30. McCauley, R., McGuire, P. and  V. Sushko. 2015. Global dollar credit: links to US monetary policy and leverage. Economic Policy 30(82): 187–229.CrossRefGoogle Scholar
  31. McGuire, P., and N. Tarashev. 2008. Bank Health and Lending to Emerging Markets. BIS Quarterly Review, December, 67–80.Google Scholar
  32. Miranda-Agrippino, S., and H. Rey. 2012. World Asset Markets and the Global Financial Cycle. NBER Working Paper, 21722.Google Scholar
  33. Nickel, S. 1981. Biases in Dynamic Models with Fixed Effects. Econometrica 49(6): 1417–1426.CrossRefGoogle Scholar
  34. Niepmann, F., and T. Schmidt-Eisenlohr. 2017. Foreign Currency Loans and Credit Risk: Evidence from U.S. Banks. CESifo Working Paper, 67002017.Google Scholar
  35. Peek, J., and E. Rosengren. 1997. The International Transmission of Financial Shocks: The Case of Japan. The American Economic Review 87(4): 495–505.Google Scholar
  36. Peek, J., and E. Rosengren. 2000. Collateral Damage: Effects of the Japanese Bank Crisis on Real Activity in the United States. The American Economic Review 90(1): 30–45.CrossRefGoogle Scholar
  37. Rajan, R., and L. Zingales. 1998. Financial Dependence and Growth. The American Economic Review 88: 559–586.Google Scholar
  38. Rey, H. 2015. Dilemma not Trilemma: The Global Financial Cycle and Monetary Policy Independence. NBER Working Paper, 21162.Google Scholar
  39. Schmitt-Grohé, S., and M. Uribe. 2017. Liquidity traps and jobless recoveries. American Economic Journal: Macroeconomics 9(1): 165–204.Google Scholar
  40. Schnabl, P. 2012. The International Transmission of Bank Liquidity Shocks: Evidence from an Emerging Market. Journal of Finance 67(3): 897–932.CrossRefGoogle Scholar
  41. Takáts, E. 2010. Was it Credit Supply? Cross-Border Bank Lending to Emerging Market Economies During the Financial Crisis. BIS Quarterly Review, June, 49–56.Google Scholar
  42. Uribe, M. and V. Yue. 2006. Country spreads and emerging countries: Who drives whom? Journal of International Economics 69(1): 6–36.CrossRefGoogle Scholar

Copyright information

© International Monetary Fund 2019

Authors and Affiliations

  • Stefan Avdjiev
    • 1
    Email author
  • Valentina Bruno
    • 2
  • Catherine Koch
    • 1
  • Hyun Song Shin
    • 1
  1. 1.Bank for International SettlementsBaselSwitzerland
  2. 2.American UniversityWashingtonUSA

Personalised recommendations