Collateral Damage: Dollar Strength and Emerging Markets’ Growth

By Pablo F Druck, Nicolas E Magud, Rodrigo Mariscal

July 29, 2015

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Pablo F Druck, Nicolas E Magud, and Rodrigo Mariscal. Collateral Damage: Dollar Strength and Emerging Markets’ Growth, (USA: International Monetary Fund, 2015) accessed November 5, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We document that, historically, although stronger growth in the U.S. increases growth in emerging markets, U.S. dollar appreciation (depreciation) cycles—which are highly persistent—mitigate (amplify) the impact on real GDP growth in emerging markets. We argue that the main transmission channel of the latter is through an income effect: as the dollar appreciates, commodity prices fall; weaker commodity prices depress domestic demand via lower real income; real GDP in emerging markets decelerates; and vice versa. These effects hold despite any potential expenditure-switching effect resulting from the relative (to the U.S. dollar) currency depreciation of emerging market economies. We also show the negative effect on emerging markets’ growth of U.S. interest rates beyond the effects of the U.S. real exchange rate and real GDP growth. Therefore, at the time of writing, emerging markets’ growth is expected to remain subdued reflecting, intera alia, the expected persistence of the strong dollar and the anticipated increased in the U.S. interest rates.

Subject: Commodity prices, Emerging and frontier financial markets, Financial markets, Financial services, Foreign exchange, Prices, Real effective exchange rates, Real exchange rates, Real interest rates

Keywords: Appreciation cycle, Asia and Pacific, Central America, Commodity exporter, Commodity prices, Depreciating cycle, Depreciation cycle, Dollar appreciation cycles, Emerging and frontier financial markets, Emerging market economy, Europe, Expenditure switching, Growth in emerging markets, Income effect, Middle East, Nominal exchange rate, Production function, Purchasing power, Real effective exchange rates, Real exchange rates, Real interest rate, Real interest rates, Real interest rates increase, South America, Stock market volatility, U.S. dollar, U.S. Dollar strength, WP

Publication Details

Pages:

42
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2015/179
Stock No:

WPIEA2015179
ISBN:

9781498323338
ISSN:

1018-5941

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