The U.S. Dollar Safety Premium

43 Pages Posted: 15 Mar 2012

See all articles by Matteo Maggiori

Matteo Maggiori

New York University Stern School of Business

Date Written: November 31, 2011


I show that the US dollar earns a safety premium versus a basket of foreign currencies and that this premium is particularly high in times of global financial stress. These findings support the view that the dollar acts as the reserve currency for the international monetary system and that it is a natural safe haven in times of crisis, when a global flight to quality toward the reserve currency takes place. During such episodes, investors are willing to earn negative expected returns as compensation for holding safe dollars. I estimate the time varying dollar safety premium by using instrumental variable techniques to condition information down.

Keywords: exchange rates, reserve currency, exorbitant privilege, currency returns, time-varying risk

JEL Classification: F31, G12, G15

Suggested Citation

Maggiori, Matteo, The U.S. Dollar Safety Premium (November 31, 2011). AFA 2013 San Diego Meetings Paper. Available at SSRN: or

Matteo Maggiori (Contact Author)

New York University Stern School of Business ( email )

New York, NY
United States

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