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

Jiang, Zhengyang, US Fiscal Cycle and the Dollar (March 18, 2019). Available at SSRN: or

Zhengyang Jiang (Contact Author)

Kellogg School of Management - Department of Finance ( email )

Evanston, IL 60208
United States

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