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  3. 2021
  4. Preliminary Program
  5. Dollar Dominance
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Dollar Dominance

Paper Session

Monday, Jan. 4, 2021 10:00 AM - 12:00 PM (EST)

Hosted By: American Economic Association
  • Chair: Mark Aguiar, Princeton University

The Causal Effect of the Dollar on Trade

Sai Ma
,
Federal Reserve Board
Tim Schmidt-Eisenlohr
,
Federal Reserve Board
Shaojun Zhang
,
Ohio State University

Abstract

This paper establishes a causal link between the dollar exchange rate and international trade flows, employing a new instrument for the U.S. Dollar that is based on domestic U.S. housing activity (Ma and Zhang (2019)). In line with the dominant currency paradigm (Gopinath et al. (2020)), import prices and quantities respond strongly toa country’s exchange rate with the U.S. dollar. Once we instrument the dollar, we find evidence for perfect pass-through of the dollar exchange rate to import prices. A dollar appreciation of 1 percent lowers import quantities by 1.5 percent for countries that fully invoice in dollars.

Original Sin Redux

Valentina Bruno
,
American University
Carol Bertaut
,
Federal Reserve Board
Hyun Song Shin
,
Bank for International Settlements

Abstract

We explore the relationship between portfolio flows and financial conditions by using a unique and comprehensive database of US investor flows into emerging market government bonds. We find that mutual funds display a more procyclical pattern of flows relative to other investor types. Delving into the dynamics of portfolio flows at monthly frequency reveals that dollar appreciation amplifies the sell-off in EM local currency bonds, but not dollar-denominated bonds, possibly reflecting clientele effects of stickier investors toward dollar-denominated bonds. Our findings underscore how borrowing in domestic currency has not insulated emerging markets from fluctuations in global financial conditions.

The Dominant Currency Financing Channel of External Adjustment

Camila Casas
,
Central Bank of Colombia
Sergii Meleshchuk
,
International Monetary Fund
Yannick Timmer
,
International Monetary Fund

Abstract

We provide evidence on a new channel of the functioning of exchange rate movements
for external adjustment. When international trade is priced in a dominant currency, firms’
dominant currency financing boosts the trade balance in response to a domestic depreciation.
Using a novel identification strategy by exploiting firms’ foreign currency debt maturity
structure in Colombia, we show that firms experiencing a stronger debt revaluation
of dominant currency debt due to a depreciation compress imports relatively more while
exports are unaffected. Dominant currency financing does not alter the response of imports
of firms that export, hold foreign currency assets, or are active in the foreign exchange
derivatives markets, as they are all hedged against a revaluation of their debt.

Exchange Rate Fluctuations and Firm Leverage

Sebnem Kalemli-Ozcan
,
University of Maryland
Ilhyock Shim
,
Bank for International Settlements
Xiaoxi Liu
,
Bank for International Settlements

Abstract

This paper quantifies the response of firm leverage to exchange rate fluctuations. When
home currency appreciates, firms who hold foreign currency debt and local currency assets observe higher net worth as appreciation lowers the value of their foreign currency
debt. These firms can borrow more as a result. When home currency depreciates, the reverse happens and firms have to de-lever with a negative shock to their balance sheets.
Using firm-level data from 10 emerging market economies during the period from 2002 to
2015, we show that firms operating in countries whose non-financial sectors hold more of
the debt in foreign currency, increase (decrease) their leverage relatively more after home
currency appreciations (depreciations). The effect of a depreciation is quantitatively larger
than that of an appreciation, especially for depreciations larger than 10 percent. By separating foreign currency debt of the corporate sector into loans and bonds, we show that our
results are due to loans in foreign currency, rather than bonds.
Discussant(s)
Emine Boz
,
International Monetary Fund
Wenxin Du
,
University of Chicago
Laura Alfaro
,
Harvard University
Mark Aguiar
,
Princeton University
JEL Classifications
  • F4 - Macroeconomic Aspects of International Trade and Finance
  • F3 - International Finance