US Fiscal Cycle and the Dollar
64 Pages Posted: 6 Dec 2018 Last revised: 3 Sep 2019
Date Written: March 18, 2019
I develop a VAR framework to estimate the term structure of the dollar's risk premium and attribute its variation to various sources. The term structure varies significantly over time, accounts for the dollar's exchange rate movement, and comoves with US equity and bond risk premia. While the dollar's short-term risk premium loads on the US fiscal cycle, interest rate differential, liquidity premium and the real exchange rate, its long-term risk premium only loads on the US fiscal cycle. When I compare the term structure dynamics with leading asset pricing models, a new volatility puzzle emerges.
Keywords: The dollar, fiscal cycle, term structure of risk premium
JEL Classification: F31, G10
Suggested Citation: Suggested Citation