Working Paper: CEPR ID: DP16245
Authors: Georgios Georgiadis; Gernot Müller; Ben Schumann
Abstract: How does global risk impact the world economy? In taking up this question, we focus on the dollar’s role in the international adjustment mechanism. First, we rely on high-frequency surprises in the price of gold to identify the effects of global risk shocks in a Bayesian Proxy VAR model. They cause a synchronized contraction of global economic activity and appreciate the dollar. Other key financial indicators adjust in line with predictions of recent theoretical work. Second, we illustrate through counterfactuals that the dollar appreciation amplifies the adverse impact of global risk shocks outside of the US via a financial channel.
Keywords: US dollar; safe-haven currencies; risk shocks; trade channel; financial channel; Bayesian proxy structural VAR; minimum relative entropy; counterfactual monetary policy
JEL Codes: F31; F41; F44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| global risk shocks (F65) | appreciation of the dollar (F31) |
| appreciation of the dollar (F31) | contraction of global economic activity (F44) |
| global risk shocks (F65) | contraction of global economic activity (F44) |
| appreciation of the dollar (F31) | increase in US Treasury premium (H63) |
| appreciation of the dollar (F31) | increase in foreign holdings of US Treasury securities (H63) |