DP16245 Global Risk and the Dollar
|Author(s):||Georgios Georgiadis, Gernot Müller, Ben Schumann|
|Publication Date:||June 2021|
|Keyword(s):||Bayesian proxy structural VAR, counterfactual, financial channel, minimum relative entropy, monetary policy, risk shocks, safe-haven currencies, trade channel, Us dollar|
|JEL(s):||F31, F41, F44|
|Programme Areas:||International Macroeconomics and Finance|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=16245|
Global risk shocks appreciate the US dollar as well as other safe-haven currencies and induce an economic contraction, synchronized across the US and the rest of the world. We establish these results in an estimated Bayesian proxy SVAR model and construct counterfactuals to shed light on the role of the dollar for the transmission of global risk. They show that the appreciation of the dollar has little bearing on US trade flows; instead it induces a sharp contraction of cross-border credit. As a result, the dollar appreciation amplifies the contractionary effects of global risk shocks in the rest of the world.