Working Paper: CEPR ID: DP18511
Authors: Ozge Akinci; Gianluca Benigno; Serra Pelin; Jon Turek
Abstract: In this paper, we highlight a new channel through which dollar fluctuations can become a self-fulfilling pro-cyclical force. We call this mechanism Imperial Circle as it makes the dollar the dominant macroeconomic variable in the context of the current international monetary system. At the core of it, there is a fundamental asymmetry between the shrinking exposure of the “real” U.S. economy to global developments versus the growing global role of the U.S. dollar. Dollar appreciation leads to a decline in global economic activity, which in turn benefits, in relative terms, the dollar itself, reinforcing the initial appreciation and its effects.
Keywords: International Monetary System; Trade Spillovers; Dollar Currency Pricing
JEL Codes: E32; E44; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Dollar appreciation (F31) | Contraction in tradeable production in emerging markets (EMs) (F19) |
| Dollar appreciation (F31) | Contraction in tradeable production in the US economy (F19) |
| Monetary policy impulse (E49) | Dollar appreciation (F31) |
| Dollar appreciation (F31) | Decline in global trade (F69) |
| Imperial circle mechanism (N13) | Amplification of dollar appreciation effect on global trade (F69) |