https://macropaperwarehouse.com/authors/samer-f.-shousha/Samer F. ShoushaHugo -- gohugo.ioen-ushttps://macropaperwarehouse.com/papers/the-dollar-and-emerging-market-economies-channels-and-impacts/https://macropaperwarehouse.com/papers/the-dollar-and-emerging-market-economies-channels-and-impacts/<p>Textbook Mundell–Fleming logic says a weaker local currency should be expansionary through net exports, yet in emerging market economies (EMEs) a stronger US dollar has been consistently associated with a downturn in real activity. Using a structural panel VAR on quarterly data for sixteen EMEs from 1996 to 2019, this paper documents that dollar appreciations lead to contractions in GDP, investment and real credit to the private sector, and to a rise in sovereign risk, while exports respond negligibly and imports contract sharply — a pattern the authors read as evidence that financial channels dominate trade channels. It then decomposes the response using an exposure-factor local-projections design that embeds four channels — dominant currency pricing, global value chain integration, balance-sheet vulnerabilities, and monetary policy credibility — and finds not only different relative importance but different timing: low monetary policy credibility (proxied by higher average inflation) amplifies the initial GDP contraction by an additional 0.2–0.3 percentage points in the first two quarters, with investment falling an additional 0.5–0.6 points, effects that are fast but temporary; balance-sheet exposure to dollar-denominated credit instead bites in the medium term, holding GDP around 0.3 percentage points lower between roughly 5 and 10 quarters and remaining statistically significant through 15 quarters, with investment effects intensifying from -0.2 to -0.5 points. The traditional trade channel is muted: the global value chain channel shows no statistically significant effects on any macro variable at conventional levels over the 15-quarter horizon, and under high dominant-currency-pricing exposure imports fall by about 0.2–0.3 points in the first year while export effects are initially insignificant and only turn positive after about eight quarters. Dollar innovations account for roughly 14% of GDP, 18% of investment and 28% of private credit forecast-error variance in these economies, versus about 8% for exports. The authors are explicit that the paper does not identify the fundamental sources of dollar fluctuations and that their objective is to understand how EMEs react to broad real dollar movements and which country characteristics matter most for transmission; they read the results as favouring stronger institutions — credible monetary frameworks and macroprudential management of foreign-currency borrowing — rather than as an argument for fixed or heavily managed exchange rates.</p>