Summary:New research suggests a strong dollar may hamper investment in emerging economies.
A strong dollar may not be so good for emerging markets, according to new research co-authored by Valentina Bruno, an associate professor of finance at American University’s Kogod School of Business.
Bruno along with co-authors, Stefan Avdjiev, Catherine Koch and Hyun Song Shin of the Bank of International Settlements, will present the findings from their paper, “The Dollar Exchange Rate and Global Risk Factor: Evidence from Investment,” on Thursday during a talk at the International Monetary Fund’s Eighteenth Jacques Polak Conference in Washington, D.C.
The researchers examined relationships among cross-border bank flows, US dollar, and corporate investments in 34 emerging market economies and more than 14,000 firms. After analysis of the data, the researchers found a strong dollar was associated with slower dominated cross-border bank flows and lower real investment in emerging market economies.
“The US dollar is a key barometer of global credit conditions,” Bruno said. “When the dollar depreciates, there is more dollar credit available to borrowers, loosening financial conditions globally. In this sense, what happens in the financial markets does not always stay in the financial markets, but it does have consequences for the real economy.”
Bruno and her co-authors say that we are going through a soft patch investment globally. Not much is known on why firms are reluctant to make investments, but they found three things happen when investments do not occur.
“There is a strong negative relationship between the US dollar and cross-border bank lending denominated in US dollars,” they write. “Second, increases in US dollar denominated cross-border bank credit to a given emerging market economies are associated with greater real investment in that emerging market economy. Finally, a strengthening of the US dollar triggers a decline in real investment in that country.”
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