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The nature of the shock matters: NiGEM estimations of the macroeconomic effects of recent dollar and euro fluctuations

Published online by Cambridge University Press:  01 January 2020

Sophie Haincourt
Sophie Haincourt*
Affiliation:
Banque de France
*
E-mail: sophie.haincourt@banque-france.fr
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Abstract

Exchange rate fluctuations have been particularly large since mid-2014, displaying divergent developments across the period. The nominal effective exchange rate of the dollar has appreciated by 15 per cent since June 2014, masking a 25 per cent appreciation to December 2016 followed by a depreciation of 8 per cent. Changes in the euro have turned positive after being negative. This article attempts to measure the impact of currency changes on domestic activity, accounting for the source of fluctuations. More specifically, by using the multi-country structural model NiGEM, we show that different types of exchange rate shocks can have different macroeconomic outcomes. Focusing on the period from January 2017 to February 2018, we show that the depreciation of the dollar, stemming mostly from changes in sentiment in foreign exchange markets, would in fact have been detrimental to US growth. A weaker currency, in this particular case, turned out to be no recipe for stronger growth. Similarly, the appreciation of the euro, triggered by a fall in the risk premium of the currency, may have been positive for growth. There are caveats to the exercise, but the results are nonetheless consistent with previous research pointing to the importance of the nature of the exchange rate shocks in estimating their impact on prices and growth.

Keywords

Exchange rate pass-throughglobal structural modelsF41E27
Type
Research Articles
Information
National Institute Economic Review , Volume 244 , May 2018 , pp. R30 - R38
Copyright
Copyright © 2018 National Institute of Economic and Social Research

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Footnotes

This article draws on research to be published in June 2018 (Ferrara et al., 2018). Fabien Lebreton provided excellent statistical assistance. The article benefited from comments by Laurent Ferrara (Banque de France).

References

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