A new global financial cycle in under way
In this paper, Obstfeld and Zhou use a statistical model tracking variables across 26 emerging market and developing economies EMDEs to document how dollar-appreciation shocks lead to economic downturns, a feature of the world economy since the early 1970s when the Bretton Woods system of fixed exchange rates fell apart. They document that dollar appreciation shocks predict declines in output, consumption, investment, and government spending in EMDEs. Accompanying these developments are a decline in the traded-good sector, a depreciation of the local currency against the dollar, a fall in the terms of trade (that is, a rise in the price of imports relative to exports), a decline in domestic credit, and a widening of the sovereign borrowing spread for foreign-currency loans.
They argue that although the latest run-up in the dollar is not yet exceptionally big, it comes at a time when the world economy faces persistent pandemic-related supply-chain disruptions, the war in Ukraine, and high energy and food prices. Danger signals are flashing already.
The dollar has strengthened considerably since mid-2021 and a contractionary phase of the global financial cycle is now under way. Owing to increases in public- and business-sector debts during the pandemic, a strong dollar, higher interest rates, and slower economic growth will be challenging for EMDEs.
The Global Dollar Cycle
Authors: Maurice Obstfeld, Haonan Zhou
From: University of California, Berkeley, Princeton University
Can the dollar’s surge reverse?
Might the dollar’s recent surge against other major currencies go into reverse? To be sure, some previous big run-ups in the dollar’s value, including in the mid-1980s and the early 2000s, were eventually followed by sharp declines. But, again, exchange rates are notoriously difficult to predict, even on a one-year horizon. A further 15% fall in the euro and the yen against the US currency is entirely possible, particularly if geopolitical frictions take another turn for the worse. The only thing that can be said with certainty is that the period of extraordinarily quiescent major-currency exchange rates, beginning back in 2014, is now history.
Will the Dollar’s Surge End in Whiplash?
By: Kenneth Rogoff – Harvard University
Thoughts on the dollar’s hegemony
In this paper, Thomas Palley distinguishes two phase of dollar hegemony: Dollar hegemony 1.0 which corresponds to the Bretton Woods era (1946-1971). Dollar hegemony 2.0 which corresponds to the Neoliberal era (1980-Today). According to Palley, dollar hegemony 2.0 rests on the reconstruction of the US and global economies which have made the US the center of global capitalism and the most attractive place to hold capital. It is a financial model intrinsically connected to Neoliberalism. He argues that there are two main questions that arise now:
- Is there a better way of organizing the world monetary order, which is associated with debate about the possibility of a new Bretton Woods?
- What is the future of dollar hegemony?
Theorizing dollar hegemony, Part 1: the political economic foundations of exorbitant privilege
Author: Thomas I. Palley
From: Post Keynesian Economic Society
