Dollar Safety and the Global Financial Cycle
62 Pages Posted: 6 Feb 2019 Last revised: 19 Aug 2023
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Dollar Safety and the Global Financial Cycle
Dollar Safety and the Global Financial Cycle
Date Written: July 10, 2019
Abstract
We develop a model of the global financial cycle with one key ingredient: the international demand for safe dollar assets. The model matches patterns of dollar borrowing and currency mismatch, the U.S. external balance sheet, exorbitant privilege, spillovers of the U.S. monetary policy to the rest of the world, and the dollar as a global risk factor. In doing so, we lay out a novel transmission mechanism through which the U.S. monetary policy affects the currency market and the global economy. The global financial cycle is a dollar cycle.
Keywords: Safe Asset Demand, U.S. Monetary Policy, Convenience Yields, Exchange Rates
JEL Classification: E42, F34, G15
Suggested Citation: Suggested Citation