Abstract
We document a negative relation between the strength of the U.S. dollar and emerging markets’ growth: when the dollar is strong, emerging markets’ real GDP growth decreases—and vice versa. The main transmission channel is through (i) an income effect owing to the impact of the dollar on global commodity prices, and (ii) capital/production-inputs imports. As the dollar strengthens, dollar-commodity prices fall, depressing domestic demand growth via lower dollar income, thus reducing emerging markets’ growth. Domestic demand decelerates in countries relying on importing capital/inputs for domestic production, as their cost increases when their currencies weaken, despite any expansionary expenditure-switching effect.
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More From: The North American Journal of Economics and Finance
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