Global dollar shocks and the development drag index

Abstract

This paper quantifies how global dollar shocks redistribute macro-financial stress toward developing economies. We construct an annual country-year indicator, the Development Drag Index (DDI), which measures the recurring cost of dollar dependence as a share of GDP. The DDI aggregates import price pass-through, reserve carry costs, and sovereign spreads on foreign-currency debt. Using a shift-share two-way fixed effects design for 2016–2024, we interact common dollar shocks with time-invariant country exposure. Quantitatively, crisis-scale dollar appreciations are associated with an increase in the DDI for highly dollar-exposed developing economies, while routine dollar movements have no detectable effect.