Global risk and the dollar

• Published in: Journal of monetary economics Vol. 144; p. 103549
• Main Authors: Georgiadis, Georgios, Müller, Gernot J., Schumann, Ben
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01-05-2024
• Subjects: Bayesian proxy structural VAR; Dollar exchange rate; Global risk shocks; International transmission; International transmission; Global risk shocks; F31; F42; F44; Bayesian proxy structural VAR; Dollar exchange rate
• ISSN: 0304-3932; 1873-1295
• DOI: 10.1016/j.jmoneco.2024.01.002

The dollar is a safe-haven currency and appreciates when global risk goes up. We investigate the dollar’s role for the transmission of global risk to the world economy within a Bayesian proxy structural vector autoregressive model. We identify global risk shocks using high-frequency asset-price surprises around narratively selected events. Global risk shocks appreciate the dollar, induce tighter global financial conditions and a synchronized contraction of world economic activity. We benchmark these effects against counterfactuals in which the dollar does not appreciate. In the absence of dollar appreciation, the contractionary impact of a global risk shock is much weaker, both in the rest of the world and the US. For the rest of the world, contractionary financial channels thus dominate expansionary expenditure switching when global risk rises and the dollar appreciates.
•We study the role of dollar appreciation for the effects of global risk shocks.•We benchmark baseline estimate against no-appreciation counterfactuals.•Results suggest dollar appreciation amplifies contractionary effect of global risk.