Broad Dollar Shocks and Economic Activity in Trade-Heavy Countries: The Role of Government Size

Ibhagui, Oyakhilome and Olarewaju, Favour (2020): Broad Dollar Shocks and Economic Activity in Trade-Heavy Countries: The Role of Government Size.

Abstract

This paper investigates how government size influences the responses of government expenditure and economic growth to broad dollar shocks in 155 trade-heavy countries across 6 continents from 1995 to 2019. In most cases, we document that the magnitude of contractions in expenditures and economic growth from broad dollar appreciations depends on the size of government. Countries with large governments experience a more severe negative impact from dollar appreciations than countries with smaller governments and this is true for different expenditure types: total, current and capital government expenditures. Accordingly, government size plays a role in the disparities observed in the responses of expenditure and growth to broad dollar shocks across these countries.

• Item Type: MPRA Paper
• Language: English
• Keywords: Dollar Shocks, Economic Growth, Government Expenditure, Trade-heavy Countries
• Subjects: F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics

References

1. Abasimi, I., Li, X., Salim, A., & Khan, M. I. (2019). The Role of Institutions in Affecting the Course of International Trade in The Neighboring Countries of Ghana. Journal of Business School, 2(3), 28-39.

2. Avdjiev, S., Bruno, V., Koch, C., & Shin, H. S. (2019). The dollar exchange rate as a global risk factor: evidence from investment. IMF Economic Review, 67(1), 151-173.

3.Bebczuk, R., Galindo, A., & Panizza, U. (2010). An evaluation of the contractionary devaluation hypothesis. In Economic Development in Latin America (pp. 102-117). Palgrave Macmillan, London.

4. Beetsma, R., Giuliodori, M., & Klaassen, F. (2006). Trade spill-overs of fiscal policy in the European Union: a panel analysis. Economic policy, 21(48), 640-687.

5. Bénétrix, A. S., & Lane, P. R. (2013). Fiscal cyclicality and EMU. Journal of International Money and Finance, 34, 164-176.

6. Bruno, V., & Shin, H. S. (2015). Cross-border banking and global liquidity. The Review of Economic Studies, 82(2), 535-564.

7. Bruno, V., & Shin, H. S. (2019). Dollar Exchange Rate as a Credit Supply Factor–Evidence from Firm-Level Exports.

8. Bruno, V., Kim, S. J., & Shin, H. (2018). Exchange rates and the working capital channel of trade fluctuations. In AEA Papers and Proceedings, 108, 531-36).

9. Casas, C., Diez, M. F., Gopinath, G., & Gourinchas, P. O. (2017). Dominant currency paradigm: A new model for small open economies. International Monetary Fund.

10. Debelle, G. (2019). A Balance of Payments. Address to the Economic Society of Australia, Canberra, 27 August.

11. Druck, P., Magud, N. E., & Mariscal, R. (2018). Collateral damage: Dollar strength and emerging markets’ growth. The North American Journal of Economics and Finance, 43, 97-117.

12. Fleming, J. M. (1962). Domestic financial policies under fixed and under floating exchange rates. Staff Papers, 9(3), 369-380.

13. Goldberg, L., & Tille, C. (2009). Macroeconomic interdependence and the international role of the dollar. Journal of Monetary Economics, 56(7), 990-1003.

14. Gopinath, G., Boz, E., Casas, C., Díez, F. J., Gourinchas, P. O., & Plagborg-Møller, M. (2020). Dominant currency paradigm. American Economic Review, 110(3), 677-719.

15. Ho, S. Y. (2018). Analysing the sources of growth in an emerging market economy: The Thailand experience.

16. Hofmann, B., Shim, I., & Shin, H. S. (2016). Sovereign yields and the risk-taking channel of currency appreciation.

17. Ibhagui, O. (2019). The Transfer Problem Surfaces in Sub-Saharan Africa: Net Foreign Assets, Financial Liberalization and Real Exchange Rates. Review of Economic Analysis, 11(3).

18. Kearns, J., & Patel, N. (2016). Does the financial channel of exchange rates offset the trade channel? BIS Quarterly Review December.

19. Kohn, D., Leibovici, F., & Szkup, M. (2016). Financial frictions and new exporter dynamics. International economic review, 57(2), 453-486.

20. Lane, P. R., & Milesi-Ferretti, G. M. (2004). The transfer problem revisited: Net foreign assets and real exchange rates. Review of Economics and Statistics, 86(4), 841-857.

21. Mundell, R. A. (1963). Capital mobility and stabilization policy under fixed and flexible exchange rates. Canadian Journal of Economics and Political Science/Revue canadienne de economiques et science politique, 29(4), 475-485.

22. Priewe, J. (2016). The enigmatic dollar-euro exchange rate and the world's biggest forex market: Performance, causes, consequences (No. 49). IMK Study.

23. Ramey, V. A. (2011). Can government purchases stimulate the economy? Journal of Economic Literature, 49(3), 673-85.

24. Sadeghi, A. (2017). Oil Price Shocks and Economic Growth in Oil-Exporting Countries: Does the Size of Government Matter? International Monetary Fund.

25. Sakyi, D., & Egyir, J. (2017). Effects of trade and FDI on economic growth in Africa: an empirical investigation. Transnational Corporations Review, 9(2), 66-87.

26. Shousha, S. (2019). The dollar and emerging market economies: financial vulnerabilities meet the international trade system. FRB International Finance Discussion Paper, (1258).

27. Vivek, S. (2018). Model performance & cost functions for classification models. Towards Data Science.

28. Waugh, M. E., & Ravikumar, B. (2016). Measuring openness to trade. Journal of Economic Dynamics and Control, 72, 29-41.

29. Wieladek, T. (2016). The varying coefficient Bayesian panel VAR model.