Dollar Safety and the Global Financial Cycle

60 Pages Posted: 6 Feb 2019 Last revised: 19 May 2021

See all articles by Zhengyang Jiang

Zhengyang Jiang

Kellogg School of Management - Department of Finance; National Bureau of Economic Research (NBER)

Arvind Krishnamurthy

Stanford Graduate School of Business

Hanno N. Lustig

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: July 10, 2019

Abstract

We develop 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. Our model also helps resolve the reserve-currency paradox of Maggiori (2017), reconciling how dollar appreciation in a crisis can satisfy both the financial market and the goods market equilibria.

Keywords: Covered interest rate parity, exchange rates, safe asset demand, convenience yields

JEL Classification: E42, F34, G15

Suggested Citation

Jiang, Zhengyang and Krishnamurthy, Arvind and Lustig, Hanno N., Dollar Safety and the Global Financial Cycle (July 10, 2019). Stanford University Graduate School of Business Research Paper No. 19-16, Available at SSRN: https://ssrn.com/abstract=3328808 or http://dx.doi.org/10.2139/ssrn.3328808

Zhengyang Jiang (Contact Author)

Kellogg School of Management - Department of Finance ( email )

Evanston, IL 60208
United States

HOME PAGE: http://sites.google.com/site/jayzedwye/

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Arvind Krishnamurthy

Stanford Graduate School of Business ( email )

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Hanno N. Lustig

Stanford Graduate School of Business ( email )

Stanford GSB
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National Bureau of Economic Research (NBER)

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