The global spillovers of the US dollar cycle

Purpose This paper aims to examine the global spillover effects of the US dollar cycle on output, inflation, equity markets and exchange rates in other economies. It further analyzes the country-specific characteristics that mediate these transmission channels. Design/methodology/approach The study uses the local projection method using data from 32 countries. This approach is analogous to the traditional Vector Autoregression framework; however, instead of relying on a recursively defined system of equations, it estimates dynamic responses to shocks through a sequence of local regressions. Findings Using data from 32 countries, the author finds that an appreciating US dollar exerts significantly negative spillover effects on the global economy. However, these effects are less severe in countries characterized by greater trade openness, flexible exchange rate regimes and strong institutional quality. Further analysis reveals that the spillover effects are more pronounced in economies with high levels of external debt and during periods of elevated economic uncertainty. Finally, the findings suggest that well-designed macroprudential policies can help countries mitigate their vulnerability to fluctuations in the US dollar cycle. Originality/value This paper contributes to the literature in two principal ways. First, it enriches the relatively underdeveloped body of work examining the effects of the US dollar cycle on other economies. Second, it is related to the expanding literature on the spillover effects of the US dollar; in this regard, the contribution lies in identifying and elucidating the channels through which these spillovers materialize.