Dollar Safety and the Global Financial Cycle

58 Pages Posted: 6 Feb 2019 Last revised: 1 Aug 2022

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; National Bureau of Economic Research (NBER); Stanford University - Stanford Institute for Economic Policy Research

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 international demand for safe dollar assets. The model matches patterns of dollar borrowing and currency mismatch, the U.S. external balance sheet, 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. The global financial cycle is a dollar cycle.

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 )

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