Dollar Safety and the Global Financial Cycle
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.
We thank Jonathan Wallen and Xu Lu for research assistance. We thank Rohit Lamba, Pierre-Olivier Gourinchas, Victoria Ivashina, Helene Rey, Jesse Schreger and seminar participants at the UC-Berkeley, CEBRA, University of Chicago, ECB, Federal Reserve Board, Harvard University, Macro-Finance Society, NBER CF and IFM meeting, Northwestern University, Reserve Bank of India, Stanford University, Tsinghua, and AFA for their comments. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.