Real Exchange Rates and the Global Financial Cycle

RePEc Short ID: pda415
ORCID iD: 0000-0002-8522-8826

Davis, J. Scott; Zlate, Andrei

doi:10.24149/wp2416r1

Working Paper Revision

Real Exchange Rates and the Global Financial Cycle

Abstract: We study the effect of fluctuations in the global financial cycle on real exchange rates (RER). On average, a downturn in the global financial cycle leads to RER depreciation relative to the U.S. dollar. However, there is considerable heterogeneity in the RER responses among advanced, emerging and developing economies; between net creditor and net debtor countries; and over time. When decomposing RER changes into components reflecting the nominal exchange rates and inflation differentials, we again uncover substantial heterogeneity across countries and over time. RER adjustments in advanced economies occurred mostly through nominal exchange rates. However, RER adjustment in emerging and developing economies occurred through both nominal rates and prices early in our sample period, but mostly through nominal rates later in the sample period.

JEL Classification: F3; F4;

https://doi.org/10.24149/wp2416r1