Working Paper: CEPR ID: DP16311
Authors: Valentina Bruno; Hyun Song Shin
Abstract: The strength of the US dollar has attributes of a barometer of dollar credit conditions, whereby a stronger dollar is associated with tighter dollar credit conditions. Using finely disaggregated data on export shipments, we examine how dollar strength impacts exports through the availability of dollar financing for working capital - an issue of importance due to the greater working capital needs for exports arising from longer supply chains and greater delay in receiving payments. We find that exporters who are reliant on dollar-funded bank credit suffer a decline in exports, and that this decline is larger than any decline in domestic sales. Our findings shed light on the broad dollar index as a global financial factor with real effects on the economy.
Keywords: US dollar; financial channel of exchange rates; global financial conditions
JEL Codes: F34; F42; F32; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Stronger dollar (F31) | Tighter dollar credit conditions (E51) |
| Tighter dollar credit conditions (E51) | Decline in export volumes (F14) |
| Stronger dollar (F31) | Decline in export volumes (F14) |
| Decline in export volumes (F14) | Higher working capital needs (D25) |
| Stronger dollar (F31) | Diminished risk-taking by banks (G21) |
| Diminished risk-taking by banks (G21) | Reduced credit supply for exporters (F34) |