Dollar Safety and the Global Financial Cycle
56 Pages Posted: 6 Feb 2019 Last revised: 4 Aug 2020
Date Written: July 10, 2019
We build a model of the global financial cycle with one key ingredient: the demand for safe dollar assets. The model matches patterns of dollar borrowing and currency mismatch, the U.S. external balance sheet, low U.S. interest rates and 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.
Keywords: Covered interest rate parity, exchange rates, safe asset demand, convenience yields
JEL Classification: F30, E42, G15
Suggested Citation: Suggested Citation